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Papers by Richard Grossman
The recent financial turmoil highlights the incentive of highly leveraged financial institutions ... more The recent financial turmoil highlights the incentive of highly leveraged financial institutions to take excessive risk, given the protection of limited liability. During the nineteenth and early twentieth century, many banks operated under liability rules which obligated shareholders to bear larger costs of bank insolvency in the form of contingent, or even unlimited liability. This paper examines the empirical relationship between the size of banks' contingent liability and their risk-taking behavior using data on British banks from 1878-1912. We find that banks with more contingent liability appear to have taken less risk. We also find evidence that the risk-reducing effects of contingent liability were larger for banks with higher leverage, suggesting that contingent capital mitigated moral hazard problem at banks. 1 We are grateful to three anonymous referees, Efraim
International Review of Law and Economics, 1996
Contemporary Economic Policy, 1998
This paper compares bank share manipulation in Israel with that in the United States prior to the... more This paper compares bank share manipulation in Israel with that in the United States prior to the passage of the Glass-Steagall Act and uses the comparison to assess the desirability of restricting the investment banking activities of commercial banks-not only in the United States and in Israel, but also in the economies in transition (EIE) of Eastern Europe. Many of the techniques of and motivations for manipulation were similar. However, because of their larger relative size, banks in Israel .were far more successful in eliminating market risk. The paper concludes that Glass-Steagall restrictions could prove a useful policy prescription in Israel, the EIE, and elsewhere in the developing world.
We study "excess volatility" in long-run British stock prices over the period from 1870... more We study "excess volatility" in long-run British stock prices over the period from 1870-1990. We find that the British stock market does exhibit "excess volatility" if the pre-WWI period is included in the sample. British price/dividend ratios before World War I were low relative to those of other nations or to post-WWI Britain, suggesting that pre-war investors were extraordinarily suspicious of those equities quoted on the market. This fear of equities may have caused the British stock market to perform poorly as a social capital allocation mechanism before World War I, and may have played a role in British industrial decline.
The Journal of Economic History, 1993
Financial History Review, 2001
This paper examines the evolution of the legal foundation under which commercial banks operated i... more This paper examines the evolution of the legal foundation under which commercial banks operated in different countries. The earliest incorporated banks were established under charters issued by sovereigns or legislatures. Subsequently, charters were issued: (1) though corporation law; or (2) via special banking codes. Countries that concentrated their note issues in central banks earlier were less in need of detailed banking codes and were, therefore, more likely to have allowed banks to operate under general corporation laws. By contrast, countries in which note issue was not centralised were more likely to have established a detailed banking code.
International Review of Law and Economics, 1996
Explorations in Economic History, 2009
We identify turning points in the value of the yen during the 1920s to determine which factors we... more We identify turning points in the value of the yen during the 1920s to determine which factors were perceived by market participants as affecting Japan's probability of returning to the gold standard. The 1920s were marked by military expansionism, political turmoil, and other dramatic political and institutional events. We conclude that changes of power between the Kenseikai and Seiyukai parties and worsening diplomatic relations with China were primarily responsible for turning points in the value of the yen. The democracy movement and the associated expansion of suffrage seem not to have been viewed as important by contemporaries.
Explorations in Economic History, 2008
This paper assesses banking market integration in Japan during the period 1889-1938 using annual ... more This paper assesses banking market integration in Japan during the period 1889-1938 using annual data on loan rates and spreads between loan and deposit rates. Banks in prefectures further from the financial centers exhibited higher loan rates and greater spreads than banks closer to the center, however, distance effects diminished over time, suggesting that banking markets became increasingly integrated due to declines in transaction costs. Additionally, loan rates and spreads varied negatively with the intensity of local bank competition, consistent with the notion of market segmentation. We speculate that Japan's anti-competitive banking regulation might have slowed the process of banking market integration.
The recent financial turmoil highlights the incentive of highly leveraged financial institutions ... more The recent financial turmoil highlights the incentive of highly leveraged financial institutions to take excessive risk, given the protection of limited liability. During the nineteenth and early twentieth century, many banks operated under liability rules which obligated shareholders to bear larger costs of bank insolvency in the form of contingent, or even unlimited liability. This paper examines the empirical relationship between the size of banks' contingent liability and their risk-taking behavior using data on British banks from 1878-1912. We find that banks with more contingent liability appear to have taken less risk. We also find evidence that the risk-reducing effects of contingent liability were larger for banks with higher leverage, suggesting that contingent capital mitigated moral hazard problem at banks. 1 We are grateful to three anonymous referees, Efraim
Contemporary Economic Policy, 2008
We analyze the timing and pattern of adoption of “shall issue” concealed-carry handgun laws. “Sha... more We analyze the timing and pattern of adoption of “shall issue” concealed-carry handgun laws. “Shall issue” laws require the authorities to issue permits to qualified applicants; “may issue” laws give the authorities more latitude to reject applications. We find three factors influence the shift from “may issue” to “shall issue.” First, more urban states are less likely to shift to
Contemporary Economic Policy, 1998
This paper compares bank share manipulation in Israel with that in the United States prior to the... more This paper compares bank share manipulation in Israel with that in the United States prior to the passage of the Glass-Steagall Act and uses the comparison to assess the desirability of restricting the investment banking activities of commercial banks-not only in the United States and in Israel, but also in the economies in transition (EIE) of Eastern Europe. Many of the techniques of and motivations for manipulation were similar. However, because of their larger relative size, banks in Israel .were far more successful in eliminating market risk. The paper concludes that Glass-Steagall restrictions could prove a useful policy prescription in Israel, the EIE, and elsewhere in the developing world.
The recent financial turmoil highlights the incentive of highly leveraged financial institutions ... more The recent financial turmoil highlights the incentive of highly leveraged financial institutions to take excessive risk, given the protection of limited liability. During the nineteenth and early twentieth century, many banks operated under liability rules which obligated shareholders to bear larger costs of bank insolvency in the form of contingent, or even unlimited liability. This paper examines the empirical relationship between the size of banks' contingent liability and their risk-taking behavior using data on British banks from 1878-1912. We find that banks with more contingent liability appear to have taken less risk. We also find evidence that the risk-reducing effects of contingent liability were larger for banks with higher leverage, suggesting that contingent capital mitigated moral hazard problem at banks. 1 We are grateful to three anonymous referees, Efraim
International Review of Law and Economics, 1996
Contemporary Economic Policy, 1998
This paper compares bank share manipulation in Israel with that in the United States prior to the... more This paper compares bank share manipulation in Israel with that in the United States prior to the passage of the Glass-Steagall Act and uses the comparison to assess the desirability of restricting the investment banking activities of commercial banks-not only in the United States and in Israel, but also in the economies in transition (EIE) of Eastern Europe. Many of the techniques of and motivations for manipulation were similar. However, because of their larger relative size, banks in Israel .were far more successful in eliminating market risk. The paper concludes that Glass-Steagall restrictions could prove a useful policy prescription in Israel, the EIE, and elsewhere in the developing world.
We study "excess volatility" in long-run British stock prices over the period from 1870... more We study "excess volatility" in long-run British stock prices over the period from 1870-1990. We find that the British stock market does exhibit "excess volatility" if the pre-WWI period is included in the sample. British price/dividend ratios before World War I were low relative to those of other nations or to post-WWI Britain, suggesting that pre-war investors were extraordinarily suspicious of those equities quoted on the market. This fear of equities may have caused the British stock market to perform poorly as a social capital allocation mechanism before World War I, and may have played a role in British industrial decline.
The Journal of Economic History, 1993
Financial History Review, 2001
This paper examines the evolution of the legal foundation under which commercial banks operated i... more This paper examines the evolution of the legal foundation under which commercial banks operated in different countries. The earliest incorporated banks were established under charters issued by sovereigns or legislatures. Subsequently, charters were issued: (1) though corporation law; or (2) via special banking codes. Countries that concentrated their note issues in central banks earlier were less in need of detailed banking codes and were, therefore, more likely to have allowed banks to operate under general corporation laws. By contrast, countries in which note issue was not centralised were more likely to have established a detailed banking code.
International Review of Law and Economics, 1996
Explorations in Economic History, 2009
We identify turning points in the value of the yen during the 1920s to determine which factors we... more We identify turning points in the value of the yen during the 1920s to determine which factors were perceived by market participants as affecting Japan's probability of returning to the gold standard. The 1920s were marked by military expansionism, political turmoil, and other dramatic political and institutional events. We conclude that changes of power between the Kenseikai and Seiyukai parties and worsening diplomatic relations with China were primarily responsible for turning points in the value of the yen. The democracy movement and the associated expansion of suffrage seem not to have been viewed as important by contemporaries.
Explorations in Economic History, 2008
This paper assesses banking market integration in Japan during the period 1889-1938 using annual ... more This paper assesses banking market integration in Japan during the period 1889-1938 using annual data on loan rates and spreads between loan and deposit rates. Banks in prefectures further from the financial centers exhibited higher loan rates and greater spreads than banks closer to the center, however, distance effects diminished over time, suggesting that banking markets became increasingly integrated due to declines in transaction costs. Additionally, loan rates and spreads varied negatively with the intensity of local bank competition, consistent with the notion of market segmentation. We speculate that Japan's anti-competitive banking regulation might have slowed the process of banking market integration.
The recent financial turmoil highlights the incentive of highly leveraged financial institutions ... more The recent financial turmoil highlights the incentive of highly leveraged financial institutions to take excessive risk, given the protection of limited liability. During the nineteenth and early twentieth century, many banks operated under liability rules which obligated shareholders to bear larger costs of bank insolvency in the form of contingent, or even unlimited liability. This paper examines the empirical relationship between the size of banks' contingent liability and their risk-taking behavior using data on British banks from 1878-1912. We find that banks with more contingent liability appear to have taken less risk. We also find evidence that the risk-reducing effects of contingent liability were larger for banks with higher leverage, suggesting that contingent capital mitigated moral hazard problem at banks. 1 We are grateful to three anonymous referees, Efraim
Contemporary Economic Policy, 2008
We analyze the timing and pattern of adoption of “shall issue” concealed-carry handgun laws. “Sha... more We analyze the timing and pattern of adoption of “shall issue” concealed-carry handgun laws. “Shall issue” laws require the authorities to issue permits to qualified applicants; “may issue” laws give the authorities more latitude to reject applications. We find three factors influence the shift from “may issue” to “shall issue.” First, more urban states are less likely to shift to
Contemporary Economic Policy, 1998
This paper compares bank share manipulation in Israel with that in the United States prior to the... more This paper compares bank share manipulation in Israel with that in the United States prior to the passage of the Glass-Steagall Act and uses the comparison to assess the desirability of restricting the investment banking activities of commercial banks-not only in the United States and in Israel, but also in the economies in transition (EIE) of Eastern Europe. Many of the techniques of and motivations for manipulation were similar. However, because of their larger relative size, banks in Israel .were far more successful in eliminating market risk. The paper concludes that Glass-Steagall restrictions could prove a useful policy prescription in Israel, the EIE, and elsewhere in the developing world.