Moral hazard, dividends, and risk in banks

In non-financial firms, higher risk taking results in lower dividend payout ratios. In banking, public guarantees may result in a positive relationship between dividend payout ratios and risk taking. I investigate the interplay between dividend payout ratios and bank risk-taking allowing for the effect of charter values and capital adequacy regulation. I find a positive relationship between bank risk-taking and dividend payout ratios. Proximity to the required capital ratio and a high charter value reduce the impact of bank risk-taking on the dividend payout ratio. My results are robust to different proxies for the dividend payout ratio and bank risk-taking. © 2014 John Wiley & Sons Ltd.

Do external funds yield lower returns? Recent evidence from East Asian economies

One of the central explanations of the recent Asian Crisis has been the problem of moral hazard as the source of over-investment and excessive external borrowing. There is however rather limited firm-level empirical evidence to characterise inefficient use of internal and external finances. Using a large firm-level panel data-set from four badly affected Asian countries, this paper compares the rates of return to various internal and external funds among firms with low and high debt financing (relative to equity) among financially constrained and other firms. Selectivity-corrected estimates obtained from random effects panel data model do suggest evidence of significantly lower rates of return to long-term debt, even among firms relying more on debt relative to equity in our sample. There is also evidence that average effective interest rates often significantly exceeded the average returns to long-term debt in the sample countries in the pre-crisis period. © 2006 Elsevier Inc. All rights reserved.

On the opportunism-independent theory of the firm

Previous developments in the opportunism-independent theory of the firm are either restricted to special cases or are derived from the capabilities or resource-based perspective. However, a more general opportunism-independent approach can be developed, based on the work of Demsetz and Coase, which is nevertheless contractual in nature. This depends on 'direction', that is, deriving economic value by permitting one set of actors to direct the activities of another, and of non-human factors of production. Direction helps to explain not only firm boundaries and organisation, but also the existence of firms, without appealing to opportunism or moral hazard. The paper also considers the extent to which it is meaningful to speak of 'contractual' theories in the absence of opportunism, and whether this analysis can be extended beyond the employment contract to encompass ownership of assets by the firm. © The Author 2005. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved.