The Journal of Finance

Equity Issuance and Adverse Selection: A Direct Test Using Conditional Stock Offers

Published: 04/18/2012   |   DOI: 10.1111/j.1540-6261.1997.tb03813.x

JOEL F. HOUSTON, MICHAEL D. RYNGAERT

We conduct a unique test of adverse selection in the equity issuance process. While common stock is the dominant means of payment in bank mergers, stock acquisition agreements provide target shareholders with varying degrees of protection against adverse price movements in the bidder's stock between the time of the merger agreement and the time of merger completion. We show that it is the degree of protection against adverse price changes and not the percent of stock offered in a bank merger that explains bidder merger announcement abnormal returns. This result is difficult to explain outside of an adverse selection framework.

Regulatory Arbitrage and International Bank Flows

Published: 09/12/2012   |   DOI: 10.1111/j.1540-6261.2012.01774.x

JOEL F. HOUSTON, CHEN LIN, YUE MA

We study whether cross‐country differences in regulations have affected international bank flows. We find strong evidence that banks have transferred funds to markets with fewer regulations. This form of regulatory arbitrage suggests there may be a destructive “race to the bottom” in global regulations, which restricts domestic regulators’ ability to limit bank risk‐taking. However, we also find that the links between regulation differences and bank flows are significantly stronger if the recipient country is a developed country with strong property rights and creditor rights. This suggests that, while differences in regulations have important influences, without a strong institutional environment, lax regulations are not enough to encourage massive capital flows.