Institutional Investors at the Helm: Navigating Responses to Foreign and Domestic Anti-Money Laundering Violations

Previous studies on corporate misconduct have often concentrated on violations of domestic regulations, and therefore our understanding of market disciplinary effects of foreign regulatory interventions is limited. To fill this void, we analyze situations in which international banks violate foreign and domestic anti-money laundering (AML) rules. We find that domestic and foreign financial-center interventions have similar stock price responses, while foreign non-financial-center interventions do not matter much for stock prices. We also study the role of institutional investors. Having a higher percentage of institutional investors leads to more negative stock price responses. We further find strong support for the conjecture that institutional investors exit their holdings when they learn that a particular bank is involved in a foreign regulatory intervention, but only if the foreign regulator resides in a financial center. Finally, we find that after news about foreign interventions has been released, the likelihood of a forced CEO turnover increases with the percentage of institutional holdings. The size and direction of the disciplinary effects that we find for foreign interventions resemble those for domestic interventions. Based on our study, we suggest that future research into misconduct must consider information on foreign malpractices, as ignoring this information produces biased results.

Peter Grundke, University Osnabrück

Marketplace lending: a viable business model? A transaction cost-based analysis

In a Diamond (1984) model setting extended by ex-ante information asymmetry it is shown that MPL platforms are typically not superior to a financial intermediary solution with banks in terms of reduced transaction costs. Only when simultaneously the default probabilities of the projects carried out by the debtors and the number of creditors per project are small, the MPL platform can dominate the bank. Private diversification of the creditors only slightly shifts the advantageousness in favor of the MPL platform solution. If the MPL platform has skin-in-the-game by taking the first loss tranche, this can have a stronger effect on the advantageousness of the MPL platform solution (depending on the additional services provided by the platform).