This macroeconomic analysis chronicles the risk behavior of market-based financial intermediaries and traditional depository institutions from 1980 to 2010 and assesses the role that competition, financial innovation and regulation played in their evolving risk behaviors. The paper aims to discuss these issues. The results indicate that the market-based and traditional intermediaries exhibited a period of diverging relative average firm-level risk behavior followed by a period of converging risk behavior. Using the derived firm-level risk measures, the impact of competition, financial innovation and regulatory changes on explaining these changing risk behaviors is explored. The results suggest that regulatory changes (i.e. deregulation) can best explain the relative risk behavior over the divergence period through late 1999 relative to the other two variables. The period from November 1999 through the financial crisis marks the converging risk behaviors across these intermediaries. Over this period, the changing nature of competition played the most important role in driving these behaviors.

This case has three primary objectives. First, it allows students to think through a conceptual cost and benefit analysis associated with the decision-making process in line with basic economic thinking. Students will revisit core concepts of marginal benefit vs marginal cost, the notion of opportunity costs and the role of sunk costs in this type of analysis, while also highlighting the nature of market structure, oligopolies and competition across firms in an industry. The second goal of this case is to consider the role of business ethics in the DC-10 case: specifically, to consider the potential influence of moral awareness and moral disengagement in unethical decisions made by McDonnell Douglas. Students will develop an understanding of these concepts and solidify their learning by applying them to the case and engaging in active discussion. Finally, the third goal of the case allows students to explore organizational culture and specifically offer recommendations for organizations thinking about the link between decision-making, the role of ethics and culture.

This paper aims to examine the impact of executive compensation on firm risk-taking behavior, measured by the volatility of stock price returns. Specifically, this analysis explores three hypotheses. First, the impact of short-term and long-term executive compensation packages on firm risk is analyzed to assess whether the packages incentivize risk-taking behavior. Second, the authors test how these compensation and risk relationships were impacted by the financial crisis. Third, they expand the analysis to see if the relationship varies across different industries. The authors find a significant and robust relationship, showing that during the post-financial crisis period firms tended to use long-term compensation shares to reduce firm risk. They also find that the relationship between various compensation components and firm risk varies across industries. Specifically, the bonus share of compensation negatively impacted firm risk in the financial services industry, while it positively impacted risk in the transportation, communication, gas, electric and services sectors. Additionally, long-term compensation share exhibits an inverse relationship with firm risk in the financial services, manufacturing and trade industries.

A common critique of the Federal Reserve over the past crisis is that it should have better anticipated the impact of the run-up in home mortgage debt and the subsequent housing market crash on the financial system. As a result, the Federal Reserve should have moved much more quickly to shore up financial markets. Our article tests the hypothesis that the impact of the housing market crash on the financial system could have been anticipated. Using a VAR model along with impulse response functions and variance decompositions, we examine the link between housing market mortgage debt shocks and the financial intermediaries’ credit market behaviour. We find important connections between key macroeconomic variables and the credit behaviour of these financial institutions. However, using the pre-crisis data, we find that housing market debt shocks fail to have an impact on the credit markets accessed by these firms. These results support the notion that the impact of this crisis on the financial system could not have been anticipated given the information available at the time.

The financial crisis highlighted the pivotal role that financial intermediaries play in the economy. Recent research has analyzed the differences between traditional and market-based financial intermediaries, noting the greater balance sheet volatility of the former category. Using these volatility differences as a basis, this paper compares the stock market delisting behavior of market-based and traditional financial intermediaries. Using survival analysis, I find that market-based intermediaries carry greater cumulative incidence of stock market delisting due to firm failure and M&A activity relative to traditional intermediaries. Additionally, idiosyncratic risk plays an important role in the survival behavior across these institutional structures.