EconSouth, Vol. 9, No. 2, Second Quarter 2007

Research Notes and News

Research Notes and News highlights recently published research as well as other news from the Federal Reserve Bank of Atlanta.

Does corporate responsibility matter to shareholders?
Corporate social responsibility (CSR) is increasingly a core component of corporate strategy in the global economy. Its importance has been highlighted in recent years by financial scandals, investors' losses, and reputational damage to listed companies. While the fact that shareholders care about returns is a given, the question of whether they care about a corporation's social responsibility is the subject of a recent working paper by Leonardo Becchetti, Rocco Ciciretti, and Iftekhar Hasan.

From a theoretical point of view, no clear-cut answer to this question exists. On one hand, CSR carries the higher costs of improving the well-being of various stakeholders. On the other hand, CSR can have advantages such as an improved reputation and more motivated employees. Financial markets provide one method of assessing the effect of CSR on shareholder value.

In the working paper, the authors look at CSR's impact and relevance in the capital market by focusing on the market's reaction to CSR initiatives. Examining the change in market value around entries and exits from the Domini Social Index, a recognized CSR benchmark, from 1990 to 2004, they find that leaving the index has a negative effect on a company's returns, even after controlling for financial distress shocks and stock market seasonality. This negative effect, they note, is a reaction from ethically screened indexes.
Working Paper 2007-6
April 2007

Special Economic Review issue focuses on safe and sound banking
A recent issue of the Atlanta Fed's Economic Review presents the papers, commentaries, and discussions from a 2006 conference titled "Safe and Sound Banking: Past, Present, and Future." The conference, cosponsored by the Atlanta and San Francisco Feds and the founding editors of the Journal of Financial Services Research, paid homage to the 1986 book Perspectives on Safe and Sound Banking: Past, Present, and Future. The book's five authors were commissioned by the American Bankers Association to assess and recommend policy options to improve the banking system's efficiency, performance, and safety. The 2006 conference evaluated whether—and how—the book's recommendations have been implemented, assessed the current state of the banking industry, and updated the menu of recommendations to address the challenges confronting banking.

The paper by Frederick Furlong and Simon Kwan reviews the principal recommendations made in the 1986 report and then analyzes related developments during the past two decades. Robert DeYoung's paper outlines the fundamental structural changes in commercial banking during that time, comparing the "transactions banking" business model large financial companies use to the more traditional relationship-based banking business model. Mark Flannery's paper identifies seven underresearched and/or underappreciated issues that affect bank safety and soundness or financial system stability.

In a roundtable discussion, the five economists who wrote Perspectives on Safe and Sound Banking assess how legislative and regulatory changes have reshaped the banking landscape and weigh in on what tasks remain to ensure the continued health of the banking and financial system.
Economic Review
First and Second Quarters 2007

In Atlanta, Bernanke discusses monetary policy, finance
Addressing a June 15 conference at the Atlanta Fed on "The Credit Channel of Monetary Policy in the 21st Century," Federal Reserve Chairman Ben Bernanke took his listeners on what he called "a whirlwind tour of several decades of research on how variations in the financial condition of borrowers, whether arising from changes in monetary policy or from other forces, can affect short-term economic dynamics."

Speaking to an audience of Federal Reserve and academic economists and central bankers, Bernanke summarized several important research concepts. One of these is the financial accelerator effect, whereby a real shock can "lead to persistent fluctuations in the economy, even if the initiating shock had little or no intrinsic persistence." This concept, Bernanke noted, "can help to explain the persistence and amplitude of cyclical fluctuations in a modern economy." In addition, "financial accelerator effects need not be confined to firms and capital spending but may operate through household spending decisions as well."

Bernanke traced these ideas through research on monetary policy effects, discussing, in particular, the theory of the bank-lending channel. This theory "holds that monetary policy works in part by affecting the supply of loans offered by depository institutions," he explained.

"The critical idea is that the cost of funds to borrowers depends inversely on their creditworthiness, as measured by indicators such as net worth and liquidity," Bernanke said. Endogenous changes in creditworthiness may increase the financial accelerator effect and strengthen the influence of the credit channel.