The Student Honors Papers collection represent exemplary work in Business Administration at Illinois Wesleyan University. The Ames Library is proud to archive these and other honors projects in Digital Commons @ IWU, the University's online archive of student, faculty and staff scholarship and creative activity.
More than 400 banks failed during the recent financial crisis. Bank failures have a significant impact on the financial system and the economy as a whole. It is important to identify factors that may contribute to bank failures so that banks can take measures to reduce their default risk. This paper examines how bank specific characteristics and economic conditions affect bank failures during the recent financial crisis. We employ the logistic regression model to study this issue using the U. S. commercial bank data over the sample period 2007-2012. We find that the ratio of the loan and leases to total assets, real estate loan ratio, and non-performing loan ratio have a positive influence on the bank failures while capital adequacy ratios, return on assets, liquid ratio, and GDP growth rate have a negative impact on bank failures.
Determinants of Dow Jones Returns
by Cory Sloan
As of 2010, there was $14 trillion invested in the New York Stock Exchange (NYSE) and $55 trillion invested in stock markets worldwide. In this study, we use the Arbitrage Pricing Theory (APT) to identify the main determinants of the returns of the stocks that compose the Dow Jones for the period 1990-2011. We test several hypotheses on the relationship between firm specific variables such as Dividend Yield, Earnings Yield, Book-Market ratio, previous returns and the stock returns. We also document the relationship between several macroeconomic factors including T-bill rate, Default Spread, Term Spread, Unemployment, Real GDP and Inflation and stock returns. Our results indicate a significant relationship between Earnings Yield, Past Return, Unemployment, Inflation, Term Spread, T-bill rate, Real GDP and the stock returns.
Macroeconomic Determinants of Gold Industry Stock Returns
by Michael Chau
Over the past 12 years, the gold bullion continues to become a significant investment. Financial advisors and analysts have recommended investors invest a small portion of their portfolio into this precious metal commodity asset. Gold mining stocks offer investors the ability to leverage volatile but rising gold prices. The expected relationship between gold price and gold stock returns is that for every 1% increase in gold prices, gold stocks can be expected to gain 2-3%. Building on a multifactor model by Faff and Chan (1998), we examine how macroeconomic factors such as market returns, the foreign exchange rate, and the interest rate affect the U.S. gold industry stock returns over the period 1996-2011. We contribute to the literature by exploring the significance of business cycle’s in explaining gold stock returns.
New Evidence on the Wealth Transfer during the Argentine Crisis
by James Lam et al.
In this study, we investigate the wealth preservation hypothesis and revisit the theory of wealth transfer from Argentina to the United States during the Argentine crisis. We show that the boom experienced by the Argentine stock market is explained by both wealth preservation through top non-ADR stocks and by wealth transfer through ADR stocks. Argentine investors without access to trading abroad preserved wealth by converting their bank deposits into the most liquid ADR and non-ADR stocks. An investment in a portfolio of less liquid ADRs resulted in a wealth loss, unless used as a vehicle to transfer funds abroad.
During the recent financial crisis, 325 U.S. banks failed whereas only 24 banks failed from 2000-2006. It is important to identify how banks’ operations and changes in the economic environment might influence the total risk level faced by U.S. banking institutions in order to avoid the number of bank failures experienced during the recent recession. This study analyzes publicly traded banks in the U.S. from 1978 to 2010. Various accounting ratios and macroeconomic indicators are used as proxies for the effects of individual bank operations and changes in the economic environment. Total risk, as measured by the standard deviation of ROA and ROE, is regressed against the accounting ratios and economic indicators to identify the important sources of total risk. Bank size, the equity to asset ratio, allowance for loan loss ratio, liquidity ratio, loan to asset ratio, growth in real GDP, growth in the money supply and the interest rate spread all appear to be significantly associated with total risk.
Measuring Risk-Based Capital
by Karen Anderson '97
In order to assure policyholders that their benefits will be available when they are needed, the National Association ofInsurance Commissioners (NAIC) has begun regulating insurer capital through the Risk-Based Capital (RBC) Model Act for life insurance companies. The Model Act helps state insurance regulators plan to preserve and protect adequate insurance capital levels and maintain insurer solvency. The RBC requirements provide for a ratio which assesses the level of risk that is associated with an insurance company's assets. The purpose of the NAIC's RBC calculation is to develop the minimum amount of surplus needed given the risks assumed by the company. For example, the RBC model establishes a 30% risk factor for all unaffiliated common stock held by life insurance companies. This factor was established by using the S&P 500 as an indicator ofthe volatility ofthe stock market. However, questions arise regarding whether the S&P 500 is an accurate measure of the market risk associated with life insurer stock portfolios or whether another index would better reflect their risk. Therefore, after determining the market risk reflected by several different stock indexes and analyzing a sample of insurer stock portfolios, a discussion results about whether the RBC factor needs to be changed.
This paper attempts to add to existing research on corporate payout by focusing on the role that the principal-agent problem plays on dividend policies of public and private banks. The results indicate that private banks are better able to monitor mangers use of excessive free cash flow and retaining earnings and will be more willing to let retained earnings build up without returning them to owners in the form of dividends or stock repurchases.
Report on the United States Small Business Administration
by David C. Case '67
Americals small business concerns operate in our huge economic complex, along side some very large economic giants. In this economic environment, these small businesses ere sometimes confronted with many problems. Foremost among the problems that small business faces are management weakness-involving the lack of management ability, and financial weakness relating to the lack of adequate capital and credit.
Surveying Efficiencies of Nigerian Banks before and after the Minimum Capital Requirement Increase
by Bukola Olaosebikan, '09
This study investigates the efficiency of the Nigerian banking system between the years of 1999 and 2005. Bank efficiency is evaluated using Data Envelopment Analysis (DEA), and the main determinants are identified by using a Tobit model. The results indicate that efficiency fluctuated during the first part of the period and improved during the recent years, a period associated with the increase in minimum capital requirement. Differences in bank efficiency are explained by problematic loans and bank size.
by Ralph Wright '99
The objective of this research study was to determine the degree to which people use brand names to make purchase decisions. Further, we questioned what other influences -quality/price/previous buying experience -impacted the decision. This paper will demonstrate that a sample of college students in Central Illinois generally purchase based upon a product's brand name. More specifically, the research findings indicate that these consumers associate a high level of quality with specific brands of clothing.