Date of Award

Spring 2006

Document Type

Dissertation

Degree Name

Doctor of Business Administration (DBA)

Department

Economics and Finance

First Advisor

Marc Chopin

Abstract

This dissertation is composed of three essays on banking and corporate finance. The first essay studies the relationship between interest-rate derivative usage and bank lending. Using recent data that cover a full business cycle, this paper documents a direct relationship between interest-rate derivative usage by U.S. banks and growth in their commercial and industrial (C&I) loan portfolios. This positive association holds for interest-rate options contracts, forward contracts, and futures contracts. This result is consistent with the implication of Diamond's model (1984) that predicts that a bank's use of derivatives permits better management of systematic risk exposure, thereby lowering the cost of delegated monitoring, and generates net benefits of intermediation services.

Using recent data that spans a full business cycle, the second essay examines how derivative usage affects the interest-rate sensitivity of bank holding companies from 1998 to 2003. The major finding of this study is that stock returns of a bank holding company using derivatives are less sensitive to interest-rate changes, controlling for balance-sheet composition and asset size. This economically significant finding suggests that interest-rate derivatives allow banks to lessen their systematic exposure to changes in interest rates and thereby increase their potential to better manage their interest-rate risk exposure. This result is consistent with Diamond's (1984) prediction in which a bank can use interest-rate derivatives to hedge against interest-rate risk.

Previous research investigates how corporate finance managers make their bond-maturity decisions. The third essay is exploratory, investigating the relationship between duration and bond characteristics. The relationship between firm features and the durations of 8,627 corporate debt issues placed by U.S. corporations in public markets between 1990 and 2002 is examined. The major finding of the study is that firm quality, as measured by credit rating, is directly related to bond duration. The findings also suggest that bond duration is inversely related to firm size, that regulated non-financial firms have longer bond duration, and that syndicated offerings have longer duration than non-syndicated offerings.

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