Shivam Agarwal

Shivam Agarwal

PhD Thesis Title : Essays on Regulatory Risk in Financial Institutions

Supervisor: Professor Cal Muckley

External Examiner:
Professor John W Goodell
The University of Akron


This dissertation is a compilation of three research essays that study regulatory risk in financial institutions, and the extent to which the firms culture influences it. Using hand collected data from multiple regulators and annual reports, I examine the credibility and novelty of regulatory guidance, the effect of regulatory announcements on the recipient and peer financial firms and finally, the way and extent to which corporate culture influences banking misconduct.

In the first essay, I study the question of whether regulatory forward guidance can mitigate financial misconduct in a specified area of regulation, by utilizing a matching procedure that maps forward guidance signal to the regulatory enforcements. Consistent with the forward guidance literature, I find that the regulatory guidance, provides a credible and novel signal, in relation to the future course of priority regulatory areas in financial services. Using a difference-in-differences identification strategy, I show that around months which contain an instance of forward guidance there is a 162 percent increase in the number of related enforcement actions, in comparison to  around  months  with  no forward  guidance. After accounting for persistence of the enforcement actions, forward guidance is associated with new information in respect to subsequent sanctions.

In the second essay, I examine the capital market reaction to  regulatory enforcement announcements on recipient and peer financial firms. Despite the importance and size of enforcement actions in financial firms, only a few papers have focused on the capital market reactions on the sanctioned firms, while no papers have studied the impact of enforcements on financial peer firms. Focusing on the pure signals regulatory enforcements sanctions in the United Kingdom, I find evidence of negative capital market reaction not only on the sanctioned firms, but also, on peer firms. The spillover effect is more pronounced for financial firms with similar characteristics and business lines of sanctioned firms. This is followed by a persistent and negative post announcement drift on both the recipient and peer firms in the extended trading window. My findings, also highlight that enforcements which pierce the corporate veil have no impact on the capital market valuations of financial firms. These findings suggest that these regulatory enforcements carry a significant risk of contagion effect, which are particularly relevant to the regulatory authorities and to the peer firms.

In the third essay, I examine the extent and the way corporate culture influences corporate misconduct activities in banks. Despite the focus of regulatory bodies on the banking culture to mitigate misconduct, there has been no study to understand the role and influence of culture in misconduct within banks. Using the text in the 10-K reports as a proxy for corporate culture, I find that banks with a growth-oriented culture are more likely to receive enforcement actions whereas banks with a safety-oriented culture are less likely to receive enforcement actions. My findings are consistent with a trade-off between a culture of safety and growth in influencing bank risk-taking,  which I examine in the context of misconduct. Using 13 events of bank-branching de-regulations across 12 states following the Interstate Banking and Branching Efficiency Act (IBBEA) as exogenous shocks to the competitive environment in the banking system, I establish the causal effect of culture on misconducts.   

Discover our Rankings and Accreditations