Three Essays on Banking and Social Outcomes

Abstract

This thesis investigates three important issues related to corporate activities, banking financial variables, and social outcomes: 1) the impact of firms’ corporate social responsibility (CSR) on crime rates, 2) the relationship between banks' non-performing loans (NPL) and loan charge-offs (LCO) and state crime incidence, and 3) the influence of banks' equity capital structure on income inequality. In the first essay, we examine the societal impact of firms’ CSR activities on crime rates. Our research bolsters the expanding work under the Law and Political Economy Project out of Yale University and Economics of Crime Working Group of National Bureau of Economic Research (NBER). Our empirical results show that states with domiciled firms having better CSR performance exhibit significantly lower crime rates. This lower crime incidence is driven by the environmental, social, and governance dimensions of CSR. Our study is the first to document the societal impact of CSR by analyzing state crime rates, and we conclude that CSR activities have positive externalities on society. In the second essay, we investigate whether banks’ NPL and LCO are associated with state crime rates in the US. Our empirical results show that both NPLs and LCOs are significantly and positively associated with crimes incidence. After disaggregating the crime rates, we find a significant and positive association between the two financial reporting variables (NPL and LCO) and property crimes such as larceny, burglary, robbery, and motor vehicle theft. We conclude that bank financial reporting variables, such as non-performing loans and loan charge-offs, can serve as leading indicators of crime rates. In the third essay, we examine the relationship between bank equity capital and income inequality. Bank equity capital plays a critical role in mitigating financial instability and fostering economic resilience, as highlighted by the Basel III regulation, which increased the required level of regulatory capital to strengthen the quality of banks’ capital bases. Although the social outcome of bank equity capital is important, the literature thus far has not examined the connection between bank capital structure and social outcomes. This essay fills this research gap by investigating how bank capital structures can influence income disparity. Empirical results show that states where banks hold more equity capital experience significantly lower income inequality than do states whose banks hold less equity capital. Further analysis indicates that this beneficial effect of higher bank equity capital on reducing income inequality is more pronounced in states with higher bank interest rates, regions with higher inflation, and during financial crises. Our study identifies several important social implications of bank capitalization structure including social externality of Basel III’s stringent capital requirements.