Credit and debit card payments have been growing very rapidly. Debit card outpaced credit card in terms of number of transactions in 2003, while credit card annual transaction value was still twice as much as debit card annual transaction value in 2004. To continue the growth, payment card networks keep adding new merchants to their networks. Penetrating new cardholders, on the other hand, is becoming difficult because most consumers have both credit
and debit cards. Payment card issuers, therefore, are trying to stimulate their existing customers’ card usage by providing rewards. It has been reported that many credit and debit card issuers that launched new rewards programs have seen increases in spending on their cards. However, we are not aware of any reports telling the sources of these increases. It is unlikely that reward receivers simply increase their spending on their card without changing spending through other payment methods. Which payment methods are replaced by reward card transactions? Do reward card transactions replace transactions of other payment methods, such as cash, checks, and/or ACH? Or do they replace non-reward card transactions? To what extent do reward card transactions replace other forms of payment transactions?
The answers of above questions are important to policymakers. It is cost effective if reward card transactions replaced other types of transactions which are more costly than reward card transactions. It is not cost effective, however, if reward card transactions replaced non-reward card transactions. Operating a rewards program is not free—it uses some resources. Another concern is that rewards credit cards could potentially create inequality among consumers. Many merchants need to pay higher fees to issuers if their customers use a reward credit card instead of using a non-reward credit card. Credit card networks do not allow merchants to reject reward card payments as long as the merchants accept the network’s non-reward credit cards. The networks also prohibit merchants from price discriminating customers based on the payment method they use. As a result, the more customers use reward credit cards, the higher the merchants mark up their uniform retail prices (in order to offset higher fees). Although reward credit card holders are partly compensated for higher retail prices through rewards, other consumers are not. Furthermore, it should be noted that reward credit card holders are relatively high-income earners, while many low income customers may not even qualify for having credit cards. Therefore, rewards programs and the accompanied merchant fee structure may work as tools that distribute income from low-income earners to high-income earners.
Does corporate governance matter for market liquidity and stock price informativeness? This is an important issue in corporate finance. Gompers, Ishii and Metrick (2003) and Cremers and Nair (2005) document that corporate governance matters for stock price through private incentives of management. Ferreira and Laux (2007) find that less antitakeover provisions is associated with higher idiosyncratic risk and more informative stock price.
Financial markets experienced tremendous disruptions during the 2007-2009 financial crisis. Credit spreads across all asset classes and rating categories widened to unprecedented levels. Perhaps even more surprising, many relations that were considered to be text-book arbitrage before the crisis were severely violated. For example, in currency markets, violations of covered interest rate parity occurred for currency pairs involving the US dollar (Coffey, Hrung, Sarkar (2009)). In interest rate markets the swap spread, which measures the difference between Treasury bond yields and libor swap rates, turned negative. In Interbank markets, basis swaps that exchange different tenor LIBOR rates (e.g., 3-month for 6-month) deviated from zero. In inflation markets, break-even inflation rates turned negative. In credit markets, the CDS-bond basis which measures the difference between CDS and cash-bond implied credit spreads turned negative.
