Banks and banking

Researching the determinants of bank failure is an important task, yet the extant literature on bank failure early warning models fail to identify which model technique, sampling methodology, or set of coefficients provides the most accurate model when predicting failure on out-of-sample data. In this two-essay study, I examine previously published studies on bank failure prediction to determine with statistical significance which among the chosen set is most accurate. I also examine the effects of bias-adjusting models from the Machine Learning literature to determine if bias-correcting sampling algorithms improve accuracy.
In the first essay, I replicate three bank failure models (Martin (1977), Cole and White (2012), and DeYoung and Torna (2013) and use them to demonstrate the importance of out-of-sample predictive accuracy using bias-adjusting metrics and the use of McNemar’s Test to show, with statistical significance, that one set of predictive variables is better than the rest. Future researchers may use this framework to demonstrate significant contributions to the field, and regulators may apply these strategies to choose between candidate early warning models. I also test whether including savings banks (in addition to commercial banks) affects out-of-sample predictive accuracy.

In essay 1 (Investment bank role in acquisition of private targets), using a sample of private targets from January 1992 to December 2010, I find that special information asymmetry when bidders prusue private targets alters the factors used by bidders and targets to decide whether to hire an investment bank.... It appears that the investment bank has a significant impact on the outcome of the acquisition of a private target. In essay 2 (Investment bank role in asset sell-off transactions), I also find that special information asymmetry when a buyer pursues divested assets alters the factors used by the buyer and seller to decide whether to hire an investment bank. ...I find that when the seller empoloys an investment bank, the increase in unsystematic and total risk of the buyer is greater than in cases when the seller does not use an investment bank.