Dominik Roesch, State University of New York-Buffalo
Abstract: We investigate institutional trading of American Depositary Receipts (ADRs) around ex-dividend dates motivated by recent concerns of abusive practices of ADR pre-releases and illegal refunds of tax credits. Using data on US stocks, foreign stocks, and ADRs from 1999 to 2014, we document abnormally large trading volumes around ex-dividend dates, especially on ADRs, exacerbating price impact. Tax-exempt institutions net sell and---contrary to common wisdom---taxable institutions net buy ADRs before ex-dividend dates. We estimate that taxable US institutions potentially claim illegal tax refunds costing US and foreign tax payers more than US$150 million during our sample period.
Discussant: Shane Heitzman, University of Southern California
Abstract: This study analyzes information production and trading behavior of banks with lending relationships. We combine trade-by-trade supervisory data and credit-registry data to examine banks’ proprietary trading in borrower stocks around a large number of corporate events. We find that relationship banks build up positive (negative) trading positions in the two weeks before events with positive (negative) news, even when these events are unscheduled, and unwind positions shortly after the event. This trading pattern is more pronounced when banks are likely to possess private information about their borrowers and cannot be explained by specialized expertise in certain in-dustries or firms. The results suggest that banks’ lending relationships inform their trading and underscore the potential for conflicts of interest in universal banking -a prominent concern in the regulatory debate for a long time. Our analysis also illustrates how combining large data sets can enhance the supervision of markets and financial institutions.
Discussant: John Griffin, University of Texas-Austin
Abstract: MiFID II requires EU investment advisors to ``unbundle'' research costs from execution fees. We find evidence that this unbundling for EU Funds is accompanied by an increase in bundled commissions generated by their US counterparts. Specifically, for EU funds with US twins (a US-based fund with the same management team and investment style), the US twin exhibits higher bundled commissions (also known as ``soft dollars'') and worse net performance than other US funds following MiFID II mandated unbundling. Correspondingly, EU twin funds appear to profit from this cross-subsidization, outperforming similar US twins. Our findings suggest that agency costs are not mitigated but merely shifted from a more regulated market to a less regulated one. We conclude that in global financial markets, only internationally coordinated regulatory actions are effective.
Erica Xuewei Jiang, University of Southern California
Carlos Parra, Pontifical Catholic University of Chile
Jinyuan Zhang, University of California-Los Angeles
Abstract: We uncover that the Community Reinvestment Act (CRA), a major policy aimed to reduce geographic inequality in credit access, can actually widen disparities across regions, despite enhancing credit equality within certain regions. This adverse effect arises because banks withdraw branches from economically disadvantaged areas to sidestepping the rules. As financial activities shift towards shadow banks, the adverse impact of the CRA regulation is amplified, expanding the set of disadvantaged areas that suffer from branch withdrawals. Using a regression discontinuity design centered on a CRA eligibility threshold, we estimate banks' shadow costs of violating the CRA. We then show that banks with higher costs of CRA violation retract their branches from disadvantaged areas following the expansion of shadow banks. This retraction results in declines in small business lending, business establishments, and employment, predominantly in low-income neighborhoods within these disadvantaged regions. Such dynamics could contribute to the worsening cross-region disparities in credit access observed over the recent decade.
