This paper extends prior work on the links between political patronage and capital structure in developing economies. Three proxies of political patronage are developed and applied to a group of Malaysian firms over a 10-year period. We find a positive and significant link between leverage and each of the three measures of political patronage. We also find evidence of an indirect link between political patronage and capital structure through firm size and profitability.
In this paper we investigate audit pricing for financial institutions. We modify the standard audit fee model for industrial companies by incorporating measures of risk and complexity that are either unique to or more relevant for banks, and that are used by bank regulatory agencies. For a sample of 277 financial institutions in fiscal 2000, we find that audit fees are higher for banks having more transactions accounts, fewer securities as a percentage of total assets, lower levels of efficiency, and higher degrees of credit risk. Higher fees also obtain for savings institutions, for banks that are more involved in acquisition activity, and for institutions that are required by regulatory agencies to maintain higher levels of risk-adjusted capital. Our model reveals that the complexities and risks deemed most important by regulatory agencies are also those that tend to be priced by audit firms. The importance of the audit process for banks is likely to intensify in the future as regulatory changes increase the importance of market discipline in controlling bank risk-taking.
We investigate bank stocks' sensitivity to changes in interest rates and the factors affecting this sensitivity. We focus on whether the exposure of commercial banks to interest rate risk is conditioned on certain balance sheet and income statement ratios. We find a significantly negative relation between bank stock returns and changes in interest rates over the period 1991-1996. We also find that bank characteristics measured from basic financial statement information explain bank stocks' sensitivity to interest rate changes. These results suggest that bank managers, analysts, and regulators can use this information to assess the relative risk exposure of banks.
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