Jul 10th, 2020

SOLUTION: FINM 7401 University of Queensland Greed Or Good Deeds Journal Summary

Journal of Banking and Finance 70 (2016) 137–159 Contents lists advantageous at ScienceDirect Journal of Banking and Finance journal homepage: www.elsevier.com/locate/jbf Greed or amiable deeds: An trial of the appurtenancy among municipal political oleing and the ﬁnancial enterprise of U.S. retail banks encircling the ﬁnancial exigency Marcia Millon Cornetta,∗, Otgontsetseg Erhemjamtsa, Hassan Tehranianb a b Department of Finance, Bentley University, Waltham, MA 02452, USA Carroll School of Management, Boston College, Chestnut Hill, MA 02467, USA a r t i c l e i n f o Article fact: Received 28 May 2015 Accepted 21 April 2016 Available online 22 June 2016 JEL classiﬁcation: G21 L21 L25 M14 a b s t r a c t We inquire the appurtenancy among banks’ municipal political oleing (CSR) and ﬁnancial enterprise in a texture of the new ﬁnancial exigency. We ﬁnd that banks, in open, semblance to be payed for substance socially legitimate as ﬁnancial enterprise is unconditionally and signiﬁcantly akin to CSR chargess. We ﬁnd that the biggest banks track politically legitimate activities to a signiﬁcantly elder quantity than weaker banks. Further, the bulkyst banks see a craggy acception in CSR forces and a craggy distil in CSR matters succeeding 2009. © 2016 Elsevier B.V. All hues bashful. Keywords: Corporate political oleing Firm enterprise Commercial banks “Any new-fangled dispensation needs a ﬁnancial regularity, not solely to method payments, but besides to transfigure savings in one bisect of the dispensation into fertile cannonade in another bisect of the dispensation. However, the Obama legislation had firm, love the George W. Bush and Bill Clinton legislations anteriorly it, that it needed this ﬁnancial regularity — a regularity dominated by the thirteen bankers who came to the White House in March. Their banks used huge counteract sheets to attribute bets in brand-new ﬁnancial markets, stirring concomitantly complicated derivatives delay irbearing mortgages in a toxic hatch that howeternally poisoned the global dispensation. In the process, they grew so bulky that their implicit want threatened the stationariness of the all regularity, giving them a singular stage of leverage aggravate the legislation.” [(13 Bankers: Wall Street Takeaggravate and the Next Financial Meltdown by Simon Johnson and James Kwak, Randomhouse, 2010.)] ∗ Corresponding cause. E-mail orationes: mcornett@bentley.edu (M.M. Cornett), oerhemjamts@bentley. edu (O. Erhemjamts), hassan.tehranian@bc.edu (H. Tehranian). http://dx.doi.org/10.1016/j.jbankﬁn.2016.04.024 0378-4266/© 2016 Elsevier B.V. All hues bashful. 1. Introduction The global dispensation continues its replacement from the aggravatecome recession gone the 1930s. Suitableness there are a compute of dogmatical signs that the dispensation is sloth decent, the role the ﬁnancial toil played in this exigency is widely discussed and ruleatic. As the aggravatehead sentence alludes, banks’ obsession delay proﬁtability has been illustrious as a expressive infer for the procession of ﬁnancial innovations and imperily speculations, the comment of tall imperil loans and subprime mortgages, the acception in asset prices delayout economic plea, and besides, the unanticipated and sudden decrease in ﬁnancial asset prices foregoing to the ﬁnancial exigency. During and succeeding the exigency, banks (chiefly big banks) were heavily criticized for their want to portrayation for the contact of administration decisions on convokeiveity, e.g., for their want to be politically legitimate. However, bulky banks are aggravate lovely to be too-big-to-fail. Thus, they would not anxiety environing substance politically legitimate and its enterprise implications. In dissimilarity, when weak banks visage diﬃculties they can mobilize the patronage of stakeholders if they entertain a fact of substance politically legitimate. Depositors, the similarity, regulators, legislations may stalk into aid weak, politically legitimate banks semblance from diﬃcult situations. Thus, political oleing 138 M.M. Cornett et al. / Journal of Banking and Finance 70 (2016) 137–159 may stuff aggravate for weak banks rather than bulky banks. Given the devastating cheerfuls of bank decisions on the ﬁnancial regularity, as ﬁnancial institutions labor to repair outgrowth and uplift amiablewill, the children of banks’ whim of municipal political oleing (CSR) and its appurtenancy to ﬁnancial enterprise is aggravate bearing than eternally. The succeedinggoods of the ﬁnancial exigency and the dull economic replacement entertain consequenceed in acceptiond skepticism and inspection of retail banks’ motives and actions. Suitableness not speciﬁcally stating that banks should rearrange their political oleing, the Wall Street Rearrange and Consumer Protection Act of 2010 put big banks inferior halt inspection. A way to subdue inspection would be to rearrange their agreement in politically legitimate activities. The semblancence of political resources has consequenceed in consumers increasingly presentation their frustrations to Facebook, Twitter, and supplication sites such as www.change.org.1 Nationwide antagonisms, such Bank Transfer Day on November 5, 2011, encouraged consumers to concession their “big” banks for reputation unions and similarity banks.2 In enumeration, communities and national legislations (e.g., New York City, Los Angeles, and Boston) are pressuring and requiring banks to volunteer emend services in penninear neighborhoods and to yield similarity recannonade intentions regularly in dispose to do occupation delay them (New York Times, May 14, 2012). There is some anecdotal proof that banks are presentation CSR aggravate seriously and are laboring to repair their CSR history succeeding the ﬁnancial exigency. For stance, in August 2012, Bank of America released its remedy annual CSR declaration. The declaration talllights a compute of initiatives such as the bank’s ten-year, $1.5 trillion similarity outgrowth lending and investing end; ten-year, $2 billion kind cannonade end; and ten-year, $50 billion environmental occupation end. In September 2012, J.P. Morgan Chase released a bountiful set of CSR declarations, talllighting the ﬁrm’s global efforts to aid extend the dispensation, invigorate the communities in which it operates, diffuse educational opportunities, and promote environmental sustainability. Despite this anecdotal proof, there has been no academic scrutiny on banks’ CSR activities encircling the ﬁnancial exigency. In this Nursing Dissertation, we dare whether retail banks in in are presentation substantive stalks at substance politically legitimate, if their agreement in politically legitimate activities entertain exchanged gone the ﬁnancial exigency, and whether there is a appurtenancyship among their CSR and ﬁnancial enterprise. Using Environmental, Social, and Governance (ESG) ratings facts from MSCI ESG STATS datashameful (formerly KLD), we ﬁnd that the bulkyst banks (which were most heavily criticized for their obsession delay proﬁts and the consequenceing guide of activities that led to the exigency) acceptably entertain taller CSR forces and CSR matters throughout the exemplification bound. Further, this class sees a craggy acception in CSR forces and a craggy distil in CSR matters succeeding 2009, as the aggravatecome of the ﬁnancial exigency passed. We ﬁnd that, in twain pre-exigency and post-exigency bounds, bulkyr banks delay aggravate feminines and minorities on the consultation of directors and delay shorter-tenured directors entertain signiﬁcantly taller aggravateall CSR chargess3 and CSR strengths. In dissimilarity, weak banks’ aggravateall CSR chargess and CSR strengths are not contacted by these governance exchangeables. Simi- 1 Molly Katchpole, a 22-year-old woman from Washington, self-possessed aggravate than 30 0,0 0 0 signatures on www.change.org website opposing the intention by Bank of America to impute $5 fee for using claim cards for purchases. Due to the outpouring of complaints, Bank of America abandoned its $5 fee intention on Nov 1, 2011. (The New York Times, Nov 1, 2011). 2 This antagonism howeternally absorb big banks 2.2 pet customers: http://www. huﬃngtonpost.com/bill- cheney/bank- transfer- day_b_2056292.html. 3 As we delineate inferior, our mete of aggravateall CSR is completion compute of CSR strengths minus completion compute of CSR matters in the MSCI ESG STATS factsbase. larly, bulky banks permitted in Democratic partiality set-forths entertain signiﬁcantly taller CSR forces, suitableness weak banks do not. We ﬁnd that banks that inhale a bulkyr percentage of pawns from low pay communities entertain signiﬁcantly taller aggravateall CSR chargess and CSR forces chargess succeeding the exigency. The consequences are chiefly gentleman for bigger banks. As banks acception the plane of deposits from low pay communities from low to tall, they beseem aggravate entrenched in the communities. The consequence is a expressive acception in CSR chargess. Overall, we determine that banks, and chiefly bulkyr banks that were at the nature of animadversion for their bankruptcy of political intuition foregoing to the ﬁnancial exigency, did labor to rearrange their CSR activities succeeding the exigency. Despite the too-bigto-fail rootation of these banks, the exigency semblances to entertain served as a wakeup ole for the banks and their stakeholders to repair their CSR history. Many Nursing Dissertations entertain inquired the appurtenancy among ﬁrms’ politically legitimate comportment and their ﬁnancial enterprise in a municipal texture. New lore contends that ﬁrms track proﬁt maximizing CSR (e.g., Fatemi et al., 2009; Bénabou and Tirole, 2010; Gillan et al., 2010; Garcia-Castro et al., 2010; Dimson et al., 2013; Servaes and Tamayo, 2013; Fatemi and Fooladi, 2013)4 and get payed for their commitment to CSR in the arrange of conspicuous esteems, inferior absorb of exalted, and elder exalted inﬂows (e.g., El Ghoul et al., 2011; Goss and Roberts, 2011; Jo and Harjoto, 2011).5 Margolis et al. (2009) guide a meta-decomposition of 251 studies that inquire the appurtenancy among municipal political enterprise and ﬁnancial enterprise. Overall the appurtenancy is root to be dogmatical but weak: municipal political enterprise does not semblance to penalize companies ﬁnancially nor reduce their economic functioning. They besides ﬁnd that doing bad, if discovered, as is the case for banks during the ﬁnancial exigency, has a aggravate pronounced effect on ﬁnancial enterprise than doing amiable. As for the banking toil, proof on the appurtenancy among CSR and ﬁnancial enterprise has been unusual. For stance, Chih et al. (2010) dare a completion of 520 ﬁnancial ﬁrms in 34 countries aggravate 20 03–20 05 and determine that CSR and ﬁnancial enterprise are not akin. However, solely 162 of the exemplification 520 ﬁrms are U.S. ﬁnancial institutions and solely 8 of these entertain CSR chargess. Wu and Shen (2013) dissect 162 banks in 22 countries aggravate 2003– 2009 and declaration that CSR is unconditionally associated delay ﬁnancial enterprise in provisions of give-back on possessions, give-back on equity, net cause pay, and noncause pay. Solely 31 of the 162 exemplification ﬁrms are U.S. banks. Further, neither of these Nursing Dissertations has a facts set that assigns for an trial of CSR in banks encircling the ﬁnancial crisis. Given the actions of banks accidental up to the ﬁnancial exigency, the animadversion of banks for causing the exigency, and the rousings for banks to rearrange their reputations succeeding the ﬁnancial exigency, an trial of bank CSR activities rejectd the exigency and their appurtenancy to bank enterprise would be of bisecticular cause. The appurtenancy among CSR and ﬁrm enterprise could be overstated if we do not manage for an endogeneity tenor. 4 Other Nursing Dissertations observe at childrens other than proﬁt and esteem maximization. For stance, Bae et al. (2011) ﬁnd a ﬁrm’s rousing or ability to volunteer spotnear employee matter is an expressive determinant of its ﬁnancing device. Edmans (2011) ﬁnds that ﬁrms’ matters for other stakeholders, such as employees, may howeternally beneﬁt shareholders. 5 Similarly, Hong and Kacperczyk (2009) ﬁnd that stocks of companies confused in producing alcohol, tobacco, and gaming are near held by norm-constrained institutions such as pension intentions as compared to common or hedge capitals that are natural arbitrageurs, and they wait near coverage from analysts than do stocks of inadequately resembling characteristics. Deng et al. (2013) ﬁnd that compared delay low CSR acquirers, tall CSR acquirers verify taller concatenater announcement give-backs, taller announcement give-backs on the esteem-weighted portfolio of the acquirer and the target, and bulkyr acceptions in post-merger long-term permitted enterprise. Finally, Hong and Kostovetsky (2012) ﬁnd that common capital managers who form antagonism donations to Democrats wait near of their portfolios (not-absolute to nondonors or Republican donors) in companies that are reported politically irlegitimate (e.g., tobacco, guns). M.M. Cornett et al. / Journal of Banking and Finance 70 (2016) 137–159 Speciﬁcally, it may be that ﬁrms winning in CSR activities are of taller tendency and yield emend enterprise regardnear of whether they elect to beseem confused in CSR. To oration this endogeneity matter, we inquire the appurtenancy among CSR and ﬁrm enterprise using a two-stage instrumental exchangeable appropinquation. We use proxies for palpable political environment in the set-forth where bank is headquartered, percent of pawns from low pay counties, influence of feminine and adolescence directors on the board, and whether the bank is headquartered in a ‘green city’ as instruments for CSR agreement in the two-stage regressions. Succeeding correcting for endogeneity, we ﬁnd that banks, in open, semblance to be payed for substance politically legitimate as ROE is unconditionally and signiﬁcantly akin to CSR chargess. The biggest banks (that entertain been prisoner of putting their own causes afront of their customers and the ﬁnancial regularity as a well) trackd politically legitimate activities, such as inferior pawn fees and acceptiond services to low pay communities, to a signiﬁcantly elder quantity than weaker banks. For these banks, ampliﬁed bisecticipation in CSR activities is akin to reformd ﬁnancial enterprise. The consequences are muscular inferior manifold speciﬁcations, including choice deﬁnitions of CSR agreement and ﬁnancial enterprise, and dimension cutoffs. Banks, especially bulky banks, are now aggravate politically legitimate. The consequences semblance that this is associated delay taller bank enterprise. As such another beneﬁt of this acceptiond CSR is that the lovelihood of another exigency is inferior. In the residue of the Nursing Dissertation, Section 2 delineates the facts and methodology used in the decomposition, Section 3 discusses the consequences of the decomposition, and Section 4 determines the Nursing Dissertation. 2. Facts and methodology 2.1. Measures of CSR We ﬁrst convoke environmental, political, and governance (ESG) ratings of the bulkyst 30 0 0 publicly traded companies from the MSCI ESG STATS factsshameful aggravate 2003–2013. We elect 2003 as a starting purpose consequently that is when KLD coverage diffuses from 10 0 0 to 30 0 0 bulkyst companies.6 We then concatenate the ESG ratings facts for ﬁnancial institutions delay the Confused Declaration of Condition and Pay (i.e., Ole Reports) factsshameful from Federal Financial Institutions Trial Council (FFIEC) and the RiskMetrics Directors factsbase.7 This wholly factsset is the shameful for all our analyses. Consequently we inquire bank CSR comportment encircling the ﬁnancial crisis, we suppress 20 08 and 20 09 from the decomposition. These years portray the aggravatecome of the exigency. Substance the convergence of reprobate, banks worked to exexmodify sundry things, including their CSR activities during the exigency. Thus, we use the years 20 03–20 07 to dissect bank CSR activities anteriorly the ﬁnancial exigency and 2010–2013 to dissect bank CSR activities succeeding the exigency. Finally, eliminating banks delay solely one year of ESG rating observations consequences in a exemplification of 235 singular banks8 (delay an medium of 136 banks per year) and 1495 bank-year observations.9 6 MSGI ESG STATS factsshameful is arrangeerly notorious as KLD factsbase. KLD Research and Analytics was uncongenial by RiskMetrics Class in 2009, and RiskMetrics Group was posterior uncongenial by MSCI in 2010. MSCI ESG Scrutiny confused ESG ratings indicators in-fact in the 2010 scrutiny cycle. This can be seen most prominently delay the “concern” ESG indicators. None of the indicators is speciﬁc to banking. 7 When two ﬁnancial institutions (twain delay ESG ratings) concatenate, MSCI ESG Scrutiny evaluates the concatenated ﬁrm and determines an aggravateall ESG rating shamefuld on the wholly ﬁrms’ CSR enterprise. 8 While this compute portrays environing 40% of all publicly traded banks, the exemplification understands the biggest banks in the U.S. Completion possessions held by these banks portray aggravate 95% of completion possessions of all publicly traded banks. These are the banks that would be most watched in provisions of CSR activities and most mattered environing their CSR reputations. 9 In dissimilarity to our factsset, Wu and Shen (2013) inquire solely 31 U.S. banks. Further, their facts ends in 2009, suitableness ours runs through 2013, which assigns us to observe at CSR activities of banks anteriorly versus succeeding the ﬁnancial exigency. 139 Panel A: ESG All Force Scores 6.00 5.00 4.00 3.00 2.00 1.00 0.00 2003 2004 2005 2006 2007 2008 All forces (Banks delay TA$100 billion and banks delay completion possessions $100 billion. MSCI ESG STATS evaluates companies on 63 indicators to apprehend “strengths” and “concerns” attributes in 7 categories: similarity, environment, dissimilarity, employee appurtenancys, civilized hues, products, and governance. The MSCI ESG STATS consequence utilizes a binary portrayation of ESG ratings. If a sodality converges the criteria periodical for a rating, this is indicated delay a “1.” If a sodality does not converge the criteria periodical for a rating, this is indicated delay a “0.” Thus, banks would solely wait chargess for those indicators that are related to their operations. For stance, Biodissimilarity & Land Use is not a set-forth that is bearing for banks. Accordingly, banks would not be rated in this set-forth, i.e., banks would wait a “0” for this charges. This instrument that the ESG ratings for the exemplification banks would understand all areas bearing to banks and reject those areas that do not adduce to banks. These esteems are then summed opposing each set-forth on force and matter attributes. We form exchangeables All Strengths as the sum of ESG scores on attributes that are identiﬁed as forces and All Concerns in an together method. Following Hillman and Keim (2001) and Garcia-Castro et al. (2010), we commit resembling moment to ESG categories and form the exchangeable ESG Renunciation (besides notorious as KLD renunciation), our mete of aggravateall CSR, by subtracting All Concerns from All Strengths. Servaes and Tamayo (2013) set-forth “municipal governance is environing the mechanisms that assign the principals (shareholders) to pay and urge manage on agents (the managers)...CSR, on the other index, deals delay political objectives and stakeholders other than shareholders.” Accordingly, they reject the municipal governance set-forth from CSR metes. Similarly, Di Giuli and Kostovetsky (2014) set-forth, ESG “rates ﬁrms on municipal governance, but this is opposed from CSR so it is not understandd in our KLD score.” As in these Nursing Dissertations, we reject municipal governance 140 M.M. Cornett et al. / Journal of Banking and Finance 70 ...
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