Two Essays on the Conflict of Interests within the Financial Services Industry-- Financial Industry Consolidation: The Motivations and Consequences of the Financial Services Modernization Act (FSMA) and “Down but Not Out” Mutual Fund Manager Turnover within Fund Families

The objective of this paper is to examine the impact the Financial Services Modernization Act (FSMA) of 1999 has on the consolidation of the banking industry. The FSMA allows banks to simultaneously offer commercial banking, investment, and insurance services. I find a strong positive market response to the announcement of bank acquisition of brokerage firms (10.2 percent) and insurance companies (9.3 percent), but no significant response to bank acquisitions. I also find support for two complimentary hypotheses that explain the long-run returns to the acquiring banks. The product-market spillover hypothesis states that the post-consolidation returns of the acquirer are directly related to the banks\u27 ability to cross market their products and services to a more diverse client base, while the efficiency hypothesis states that banks acquire financial services companies to realize efficiency gains resulting from exploiting economies of scale. Finally, I show that the premiums paid in the post-FSMA acquisitions increases with the diversity of the transaction. In addition, this study is the first to link managerial turnover to mutual fund managerial structure in a manner that indicates the strong presence of a conflict of interests between investors and fund sponsors in an area of fund governance where we have been led to believe there are strong and well-functioning mechanisms to guard against the exploitation of investors. I utilize the unique characteristics of mutual funds where managers sometimes manage multiple firms simultaneously, something not generally observed in industrial firms. I test the governance mechanisms using the mutual fund complexes management structure; unitary and multiple fund management (UFM and MFM). This study shows that UFMs tend to have higher asset growth rates and higher fees than MFMs, suggesting that sponsors can benefit more from keeping them intact. I find that changing managers under the UFM is more costly to sponsors making them more reluctant to fire poor performers. I document that underperforming UFM are -2.77 percent less likely to be replaced than their underperforming MFM counterparts. In addition, the conflict of interests affect the replacement decision, as high expense ratio fund managers have a lower probability of replacement for a given level of underperformance