Political economy of finance

The financial market has moved from LIBOR to alternative interest-rate benchmarks, such as SOFR. Credit-sensitive rates, which are now becoming increasingly popular, carry greater risks than SOFR and other “risk-free rates” and must be used with great care. If not, United States legislators might need to step in to further stimulate the use of safter benchmark alternatives, writes Randy Priem.

In new research, Jitendra Aswani finds that India’s mandatory corporate social responsibility contribution for large firms increased corporate borrowing costs, but transparency and clear communication to investors about these contributions reduced the additional costs.

Randy Priem reviews the current discussions about fortifying the independence of determination committees deciding whether a credit event took place for single-name credit default swaps. He offers several possible strategies.

The Public Companies Accounting Oversight Board has proposed an amendment to its auditing standards that requires auditors to assume a larger role in corporate compliance. Roy Shapira and Luigi Zingales suggest a simple modification that addresses auditors’ concerns while improving the effectiveness of corporate compliance.

In new research, Ga-Young Choi and Alex Kim show that tax audits work to deter firm tax avoidance, but with unintended costs for investment and employment for the firm and the broader economy.

In new research, Matthias Breuer, Anthony Le, and Felix Vetter find that when companies are required by the government to seek a third-party financial audit, they turn to lower quality auditors.  As a result, the accounting industry grows, but touted benefits for markets and corporate stakeholders appear elusive.

Due to a change in how the FDIC resolves failed banks, uninsured deposits have become de facto insured. Not only is this dangerous for risk in the banking system, it is not what Congress intends the FDIC to do, writes Michael Ohlrogge.

In this second article on real estate in the current high-interest-rate environment, Joseph L. Pagliari Jr. explores banks’ exposure to commercial real estate, who might help fill the credit void as bank funding dries up, how the work-from-home phenomenon impacts commercial real estate prices, particularly the office sector, and what risks large urban centers face with emptied office buildings.

There are concerns among bankers and economists that commercial real estate prices are at risk of decreasing substantially. Joseph L. Pagliari, Jr. explains how commercial real estate should be priced based on current and projected inflation and interest rates. A subsequent article will explore if concerns about bank and broader economic vulnerabilities to lower CRE prices.

The Stigler Center is launching its fourth Political Economy of Finance conference and seeking papers on topics related to corporate social responsibility, the purpose...