Essays in banking and corporate finance

Abstract

This thesis consists of three essays on banking and corporate finance. Using a spatial model, the first chapter theoretically explores how banks compete in the deposit market under liquidity regulation. The results show that banks will make less risky investments with the introduction of liquidity constraints in addition to capital requirements in the Basel III Accord. Liquidity requirements, however, discourage banks to compete in the deposit market by lowering their deposit rates. The results justify adopting the liquidity requirements in the Basel III as necessary tools in stabilizing the financial system but only at the expense of consumer and social welfare.

The second chapter examines the role of a CEO-director connection on firm value. Using the GMM with a local supply of directors and region-fixed effects as instruments, this study conducts empirical analyses on the US firms between 1999 and 2016. The results suggest that there exist both the benefit and the cost of CEO-connected directors. CEO-director connections contribute to the firm by resolving information asymmetry. Thus, the firms with more CEO-director connections produce more innovative outputs than the firms with less CEO-director connections. On the other hand, such connections exacerbate managerial entrenchment. The results suggest that it is necessary to establish the rules on the board of directors by reflecting the firm-specific characteristics such as information transparency.

The third chapter analyzes the investment of public corporations when legal constraints cause the divergence in state-level banking competition. A state that is more opened to inter-state branching has a more competitive banking industry but experiences a reduction in public corporate investment. An entrant bank is reluctant to issue corporate loans since it lacks information on the credit quality of the borrowing corporations. On the contrary, banks that are protected from the competition are likely to take more risks in their lending. This finding is consistent with the extant literature that emphasize the importance of relationship lending between borrowers and lenders.