The Journal of Finance

Growth Opportunities and Risk‐Taking by Financial Intermediaries

Published: 07/01/1987   |   DOI: 10.1111/j.1540-6261.1987.tb04570.x

RICHARD J. HERRING, PRASHANT VANKUDRE

We show that growth opportunities which cannot be converted to cash under conditions of financial distress (Gz) are a critical determinant of an intermediary's choice of risk. Financial institutions in which Gz is a low proportion of total assets will be much more likely to engage in go‐for‐broke behavior. The model leads to a reevaluation of the effectiveness of several traditional remedies for dealing with banks that take excessive risks such as raising insurance premiums, intervening before capital is depleted, and restricting investment options. The model also has implications about a new approach to the examination of financial intermediaries.

Tax Shields, Sample‐Selection Bias, and the Information Content of Conversion‐Forcing Bond Calls

Published: 09/01/1991   |   DOI: 10.1111/j.1540-6261.1991.tb04619.x

CYNTHIA J. CAMPBELL, LOUIS H. EDERINGTON, PRASHANT VANKUDRE

The information content of conversion‐forcing bond calls depends on the after‐tax cash flow to bondholders. If the dividend after conversion exceeds the after‐tax coupon but is less than the before‐tax coupon, the call reveals unanticipated decreases in dividends and/or earnings that reduce the tax shield from interest payments. In contrast, a call when the dividend is less than the after‐tax coupon reveals the timing of an anticipated shift from exceptional firm‐specific positive growth to the industry norm. Efforts to document properties of convertible calls are subject to sample‐selection bias because calls are disproportionately associated with positive pre‐call firm‐specific growth.