Rene M. Stulz

We assess the state of knowledge about crisis risk and its implications for risk management. Data that became available after the global financial crisis show that some types of crises are predictable when accounting for interactions between risks. However, other types of crises do not seem predictable. There is no evidence that the frequency of economic and financial crises is increasing. While data show that an economic crisis is more likely following a political crisis, there is no comparable evidence for climate events. Strategies that increase firm operational and financial flexibility reduce the adverse impact of crises on firms.

We investigate whether the value of large banks, defined as banks with assets in excess of the Dodd-Frank threshold for enhanced supervision, increases with the size of their assets using Tobin's q and market-to-book as our valuation measures. Many argue that large banks receive subsidies from the regulatory safety net, so they should be worth more and their valuation should increase with size. Instead, using a variety of approaches, we find (1) no evidence that large banks are valued more highly, (2) strong cross-sectional evidence that the valuation of large banks falls with size, and (3) strong evidence of a within-bank negative relation between valuation and size for large banks from 1987 to 2006 but not when the post-Dodd-Frank period is included in the sample. The negative relation between bank value and bank size for large banks cannot be systematically explained by differences in ROA or ROE, equity volatility, tail risk, distress risk, and equity discount rates. However, we find that banks with more trading assets are worth less. A 1% increase in trading assets is associated with a Tobin's q lower by 0.2% in regressions with year and bank fixed effects. This relation between bank value and trading assets helps explain the cross-sectional negative relation between large bank valuation and size. Our results hold when we use instrumental variables for bank size.

From 1963 through 2015, idiosyncratic risk (IR) is high when market risk (MR) is high. We show that the positive relation between IR and MR is highly stable through time and is robust across exchanges, firm size, liquidity, and market-to-book groupings. Though stock liquidity affects the strength of the relation, the relation is strong for the most liquid stocks. The relation has roots in fundamentals as higher market risk predicts greater idiosyncratic earnings volatility and as firm characteristics related to the ability of firms to adjust to higher uncertainty help explain the strength of the relation. Consistent with the view that growth options provide a hedge against macroeconomic uncertainty, we find evidence that the relation is weaker for firms with more growth options.

The U.S. had 14% fewer exchange-listed firms in 2012 than in 1975. Relative to other countries, the U.S. now has abnormally few listed firms given its level of development and the quality of its institutions. We call this the "U.S. listing gap" and investigate possible explanations for it. We rule out industry changes, changes in listing requirements, and the reforms of the early 2000s as explanations for the gap. We show that the probability that a firm is listed has fallen since the listing peak in 1996 for all firm size categories though more so for smaller firms. From 1997 to the end of our sample period in 2012, the new list rate is low and the delist rate is high compared to U.S. history and to other countries. High delists account for roughly 46% of the listing gap and low new lists for 54%. The high delist rate is explained by an unusually high rate of acquisitions of publicly-listed firms compared to previous U.S. history and to other countries.

We provide estimates of holdings of highly rated securitization tranches of U.S. bank holding companies before the credit crisis and evaluate hypotheses that have been advanced to explain them. Whereas holdings exceeded Tier 1 capital for some large banks, they were economically trivial for the typical bank. Banks with high holdings were not riskier before the crisis using conventional measures, but they performed poorly during the crisis. We find that holdings of highly rated tranches were correlated with a bank's securitization activity. Theories unrelated to the securitization activity, such as “bad incentives” or “bad risk management,” are not supported in the data.

Are some banks prone to perform poorly during crises? If yes, why? In this paper, we show that a bank's stock return performance during the 1998 crisis predicts its stock return performance and probability of failure during the recent financial crisis. This effect is economically large. Our findings are consistent with persistence in a bank's risk culture and/or aspects of its business model that make its performance sensitive to crises. Banks that relied more on short‐term funding, had more leverage, and grew more are more likely to be banks that performed poorly in both crises.