Honors Projects

What Causes Bank Failures During the Recent Economic Recession?

Qingyu Li — Tue, 23 Apr 2013 14:50:29 PDT

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

Cory Sloan — Fri, 20 Apr 2012 14:07:31 PDT

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

Michael Chau — Fri, 20 Apr 2012 13:14:08 PDT

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

James Lam et al. — Mon, 25 Apr 2011 07:18:26 PDT

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.

Determinants of Banks' Total Risk: Accounting Ratios and Macroeconomic Indicators

Michael Salkeld — Fri, 22 Apr 2011 10:31:33 PDT

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

Karen Anderson '97 — Tue, 01 Mar 2011 13:15:00 PST

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.

Bank Ownership and Management Structure Affects on Principal-Agent Costs and Returning Capital

Joel Wicks, '09 — Tue, 27 Apr 2010 14:45:52 PDT

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

David C. Case '67 — Wed, 03 Feb 2010 15:57:26 PST

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

Bukola Olaosebikan, '09 — Mon, 03 Aug 2009 05:54:26 PDT

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.

Brand Consciousness

Ralph Wright '99 — Tue, 07 Oct 2008 14:33:00 PDT

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.

Advertising Aimed Toward Working Women Before and After World War II

Jennifer Bowman '94 — Tue, 07 Oct 2008 14:32:58 PDT

Even at the start of the war in Europe in 1939, women workers were only turned to as a last resort, The war in Europe had brought a flood of economic activity to America. Recovering businesses damaged during the Great Depression were once again prosperous, bringing hope to the American public for a bright future. In fact, World War II quickly "turned the unemployment problem into one of a labor shortage and rocketed the economy into new heights of production and prosperity." (Hartmann, 2) Business was booming and people were working.

Traditional beliefs "that men should be the primary or sole breadwinners in the family was especially significant in limiting women's job opportunities as long as unemployed men were still available to fill the labor needs." (Anderson, 24) The resistance to hiring women before all sources of male labor were depleted was encouraged by the War Department itself. A Civil Defense official was quoted as saying "give the women something to do to keep their hands busy as we did in the last war--then maybe they won't bother us." (Kessler-Harris, 274) Meaning women were still only expected to volunteer and do housework.

The German Automobile Industry's Reaction to the Announcement of German Reunification: An Event Study

Rhea E. Rosenlof '91 — Tue, 07 Oct 2008 14:32:56 PDT

This study seeks to explore more deeply the economic and political aspects of Reunification and the role of the West German automobile industry in the Reunification process. Due to the importance of the automobile industry in rebuilding the East German economy, an examination of the German automobile industry's reaction to the announcement of Reunification would be an important and informative economic consideration in evaluating the positive and negative consequences of German Reunification. Therefore, through the application of a "special event" methodology utilized in financial research, I intend to discover whether the German automobile industry as a whole, and the individual firms which make up the industry, reacted positively or negatively to the announcement of German Reunification, and what these reactions could mean for the future of the industry and for the future of a united German nation.

This paper details the economic and political outlook in Germany during the early months of 1990, the investments made by the West German automobile industry in East Germany prior to the announcement of Reunification, and the methodology to be applied in this study. I will then provide an analysis of the automobile industry's reaction to the announcement of German Reunification.

Effects of Store Atmosphere on Shopping Behavior

Wendy L. Billings '90 — Tue, 07 Oct 2008 14:32:55 PDT

There is little sound documentation for the actual effects of store atmosphere on shopping behavior. Some retailers have claimed that they have influenced customers' buying behavior by manipulating store atmosphere via layout, color, lighting, and music (wysocki 1979; Stevens 1980). However, this evidence is solely anecdotal. Researchers have been unable to document strong effects of store atmosphere for a variety of reasons. First, the effects evoked by store atmosphere are primarily emotional states that are difficult to verbalize. These emotions are temporary and therefore difficult to recall accurately. In addition, they influence behaviors within the store rather than more easily identifiable behaviors such as selecting which store to patronize (Donovan and Rossiter 1982). Previous retail image studies have used structured questionnaire surveys which ask respondents to rate various researcher-specified attributes according to their importance for patronage. However, this method clearly does not capture the consumer's true emotional responses to the store's atmosphere; it simply lists atmosphere as one component of store image.

In addition, the majority of previous store-atmosphere measurement, which was usually done in the context of store image research, has been conducted outside of the store environment, long after the actual shopping experience. This method is not very reliable, since it is difficult for respondents to recall accurately their emotional responses to a particular atmosphere while in a different setting.

Thus, if store atmosphere can actually affect shopping behavior within the store, it is necessary to develop a framework with which to study such effects. This study will attempt to apply the Mehrabian-Russell model, an environmental psychology framework, to explore environmental variables in retail settings.

Alcohol Advertising: Freedom of Speech v. Social Responsibility

Reona Jack '91 — Tue, 07 Oct 2008 14:32:54 PDT

In Illinois, 10% of the population, or approximately 800,000 citizens, meet the criteria to be classified as problem drinkers; nationally, one out of four children comes from an alcoholic home; and, alcohol plays a role in nearly half of America's murders, suicides, and accidental deaths, claiming at least 1,000,000 lives per year.' Not only do these statistics add up to social problems but they also reflect an increasing economic cost to society. Estimates of the cost of alcoholism and alcohol abuse reach nearly $117 billion a year, considering premature deaths, reduced work effort, and treatment.

Accounting For Derivatives

Craig Ward '96 — Tue, 07 Oct 2008 14:32:53 PDT

This paper will address the issue of disclosure concerning the derivative acitivities of publicly traded companies. The paper will begin by explaining the basics of derivatives and proceed to explain the current requirements in place to date. It will also detail the current developments of proposed new regulations for derivative activities. Then, the paper will present the results of how a sample of publicly traded companies currently account for and report their derivative positions in the financial statements. Finally, I will propose new requirements to account for and report derivatives in the financial statements. These requirements will combine ideas already proposed by some in the accounting profession, some current practices, and some original ideas to form a new set of standards in this area of accounting.

The Adaptation of Flour Milling Based Companies to Environmental Change

Thomas B. Welge '92 — Tue, 07 Oct 2008 14:32:53 PDT

It might well be argued that no other industry was as important in the civilization of man as flour milling. As man discovered the process of grain milling he was able to evolve from wanderer, to farmer, to city dweller. The sale of flour is considered by many historians to be the first industrial enterprise. Wheat, grown for over 10,000 years, was regarded as a symbol of life and power by the ancient Assyrians, Egyptians, Jews, Greeks, and Romans (steen p. 19). Both the art and business of grain milling evolved as world population grew. The cUltivation and milling of wheat migrated with man from the ancient Syrian/palestine region to Europe, Asia, and Africa (Storck & Teague p. 35). Each new society contributed some innovation which increased productivity in the industry.

Consumption Taxes: An Examination

Joshua E. Richardson '97 — Tue, 07 Oct 2008 14:32:52 PDT

The current in orne tax system fails to achieve several of these goals. This paper will examine three alternatives to the income tax: a national sales tax, a value added tax, and a personal expen iture tax. The three taxes create the same tax on an item of consumption through different methods. These options will be discussed in comparison to the current income tax on the basis of administrative efficiency, equity, economic consequences, and transitional difficulties.

Risk Management through Derivatives Securitization

Stefan Filip '07 — Thu, 11 Sep 2008 15:18:03 PDT

With the fluctuations in the financial markets reaching tens ofbillions of dollars in just one day, using complex financial instruments instead oftypical insurance could be more effective and cheaper to finance high-severity and low frequency risk exposures. Insurance-linked derivatives such as catastrophes bonds and weather bonds have been used for some time in the United States and European Union. The risks that they cover vary from property catastrophes, weather, general liability, and extreme mortality risks. As the number ofissuers for these securities increases and new over-thecounter (OTC) products appear on the secondary markets there is a growing need to understand how they should be priced and considered by law. I intend to analyze the methods ofpricing as well as creating a model for a weather derivative for the Illinois com production and test its impact based on past statistical data

The Pricing Effects of European Union Insurance

Andrew Heikes '06 — Thu, 11 Sep 2008 15:18:01 PDT

Shifting from a government-controlled system ofmotor insurance regulation to a marketbased system has caused unexpected outcomes in Italy. Although there is more competition since deregulation occurred twelve years ago, the government has had mixed results attempting to continue to control the market. This paper will examine how pricing deregulation on the European Union level has caused significant changes in the Italian market. Furthermore, it will seek to develop a national solution for regulation ofauto insurance pricing within the United States using Italian experience. Regulation in the insurance industry in the United States has been a subject ofdebate for quite some time, and although there has been consensus among researchers on the need to change current regulations, agreement on changes to make has not been quite as simple. The recommendationofthisstudyisto implementasystem offederal supervision in pricing regulation, while allowing states to conduct day-to-day oversight.

A Different Approach to Term vs. Whole Life Insurance

Neil Rubenstein '96 — Thu, 11 Sep 2008 15:18:00 PDT

This is study comparing term to whole life insurance. These two life insurance vehicles will be compared using the after-tax dollar figure of the surrender value or death benefit (for the whole life policy) and the total after-tax value of the "difference" and/or death benefit (for the term life insurance policy). These comparisons are not intended to be used to extrapolate the average rate of return needed in the future to justify the extra risk inherent in term life insurance.