Bankruptcy risk induced by career concerns of regulators

Abstract

We introduce a model in which a regulator employs mechanism design to embed her human capital beta signal(s) in a firm's capital structure, in order to enhance the value of her post career change indexed executive stock option contract with the firm. We prove that the agency cost of this revolving door behavior increases the firm's financial leverage, bankruptcy risk, and affects estimation of firm value at risk (VaR).

Bank Diversification and Overall Financial Strength: International Evidence

“…Within this context, DeYoung and Torna () also make an important contribution to the literature by looking at the impact of diversification on bank failures during the recent crisis. However, their study is limited to the US banking sector, and it may not be possible to generalize their findings at an international context, where banks will be declared bankrupt (or saved) under different laws and for potentially different political or regulatory reasons (see Petitjean, ; Cole and Cadogan, ). Furthermore, diversification may have a different impact on financial strength (regardless of its definition) in developing and developed countries, as bank managers in the former group of countries may be less efficient in managing non‐traditional activities (see, e.g., Lozano‐Vivas and Pasiouras, ).…”