o Moral hazard o Adverse selection Why do firms issue claims on the capital market?
|
|
- Marjory Sophie Holmes
- 6 years ago
- Views:
Transcription
1 Cororate finance under asymmetric information Two ig information rolems o Moral hazard o Adverse selection Why do firms issue claims on the caital market? o financing investments o for risk-sharing reasons o cashing in and moving on o trying to sell overvalued assets to investors Asymmetric information etween insiders and investors o The lemons rolem: adverse selection market reakdown cross susidization o Good orrowers may find it difficult to searate themselves from ad ones o Stock rices react negatively to equity offerings An equity offering could indicate overvalued assets Share issues are ad signals aout rofits Conversely, share uyacks are good signals o The ecking-order hyothesis internal finance f det f hyrid caital f equity o Distorted contracts may signal good orrowers qualities. nvesting too little too late, etc. Tore Nilssen Economics of the irm Set 6 Slide 1
2 o How to uild a theory Who are the insiders? And what are their ojectives? Managers? Current owners? Which contracts are offered? Who moves first the informed or the uninformed? o Who knows what? Signalling vs screening. Here: stick to insiders having rivate information Some outside investors etter informed than others? Outsiders having information that insiders don t have? nsiders information affecting also third arties? A firm may want to tell the caital market aout high market demand, ut does not want otential cometitors to know. A simle model: rivate information aout rosects Borrower has no funds: A = 0. nvestment costs. Risk neutrality. Limited liaility. Cometitive caital market. No moral hazard: B = 0. Project returns R if successful, 0 otherwise. The orrower is one of two tyes: either good with success roaility, or ad with success roaility q, where > q, and R >. Tore Nilssen Economics of the irm Set 6 Slide 2
3 Two cases o Only the good tye is creditworthy: R > > qr. o Both orrower tyes are creditworthy: R > qr >. The orrower knows her own tye. Outside investors elieve she is good with roaility α and ad with roaility 1 α. nvestors rior success roaility: m = α + (1 α)q Contract: R what orrower receives if success; 0 if failure. Benchmark: Symmetric information. G o Good orrower receives R, holding investors at G reakeven: (R R ) = o f ad orrower is creditworthy (qr > ), then she receives R such that q(r R ) =. B B o Good orrowers get higher returns: R > R G B Asymmetric information: o Stick to the simle contract: R. o nvestors cannot tell good orrowers from ad ones. o Breakeven: m(r R ) Tore Nilssen Economics of the irm Set 6 Slide 3
4 o No lending if mr <. Haens if ad tye is not creditworthy (qr < ) and exected overall rofitaility is low: [α + (1 α)q]r < α < α* = ( R ) q q Underinvestment good orrowers do not get financing, even though they have rofitale rojects. o Lending if mr. Haens either if oth tyes are creditworthy, or if the ad tye is not, ut α α*. Breakeven constraint inding: R = R m Cross-susidization investors lose money on ad orrowers and make money on good orrowers: (R R ) > > q(r R ) Overinvestment if ad tye is not creditworthy, which haens if ( R) α q /R α Tore Nilssen Economics of the irm Set 6 Slide 4
5 o A measure of adverse selection Lending requires mr q 1 ( α ) R [1 χ]r, where: χ = ( 1 α ) q Good orrowers ledgeale income R is discounted y the resence of ad orrowers. The rolem of adverse selection is increasing in the roaility of the ad tye, 1 α, and the likelihood ratio q. A counterart to the agency cost in the moral-hazard case. o With adverse selection, the good orrower does not receive the roject s NPV = R, conditioned on receiving financing as in the moral-hazard case. Rather, she receives R = (R m ) = (R ) χ. χ Tore Nilssen Economics of the irm Set 6 Slide 5
6 Private information aout assets in lace Suose the firm has an ongoing roject and only needs a deeening investment ut has no cash availale. As it stands with the assets in lace the firm has either a good roject with success roaility or a ad one with success roaility q. The roaility of the roject eing good, as seen from outside investors, is α. f the roject is good (ad), then the firm is undervalued (overvalued). A deeening investment increases the success roaility for oth roject tyes with τ, such that τr >. But contracts cannot e ased on this investment in isolation. Would the firm want to issue new shares in order to otain funds for the deeening investment? o An entrereneur with good assets in lace is less willing to let new investors in than is one with ad assets in lace. Pooling vs searating equilirium o n a ooling equilirium, the tyes ehave identically and offer outside investors identical contracts. o n a searating equilirium, the tyes ehave differently and offer outside investors different contracts. Breakeven constraint in a ooling equilirium [α( + τ) + (1 α)(q + τ)]r l = R l = m +τ Tore Nilssen Economics of the irm Set 6 Slide 6
7 Good firm s incentive constraint in a ooling equilirium: o t must e etter to carry out the deeening investment with the financing terms in the market than to kee the roject as it is now. + τ ( + τ)(r R l ) R τr m + τ χτ τr, χ τ where: χ τ = ( α )[( + τ ) ( q + τ )] = ( α )( q ) + τ + τ o Tye-deendent reservation utility: The etter roject the firm has, the higher value it gets from simly staying out of the caital market. o The deeening investment must not only e rofitale, ut sufficiently so, since τ χ o The good tye invests if χ τ is strictly ositive. the deeening investment is very rofitale, or there is little adverse selection (χ τ is low). n a ooling equilirium, oth tyes invest and carry out an equity offering. The total value of the firm after the investment, as seen from the outside, is (m + τ)r. o No stock-market reaction to the equity offering, since it is uninformative. Tore Nilssen Economics of the irm Set 6 Slide 7
8 + τ f τr <, then m + τ o the good tye would not invest in a ooling equilirium o no ooling equilirium exists o the only equilirium is a searating one, where the firm, if it is of good tye, does not invest. o the outside investors, if oserving an equity offering, understand that this must come from a ad tye and require B a higher stake: R = q +τ o there is a negative stock rice reaction to an equity offering: efore the announcement, the value of the firm to outside investors is V 0 = α[r] + (1 α)[(q + τ)r ] after the announcement, the value is V 1 = (q + τ)r there is a fall in this value if R > (q + τ)r ut we know already that R > ( + τ)(r ) > ( + τ)(r m +τ > (q + τ)(r ) = (q + τ)r q +τ ) q +τ o The ooling equilirium is more likely to exist in good times, when τ is high and/or low: Stock-rice reactions should on average e less negative in ooms. Tore Nilssen Economics of the irm Set 6 Slide 8
9 The ecking-order hyothesis: det is referale to new equity Myers and Majluf (1984) Again: in order to discuss det vs equity in a simle model, it is necessary to introduce a salvage value: return if failure is R, if success R S = R + R, where 0 < R <. No assets in lace: A = 0; so rivate information is aout rosects. Suose mr S + (1 m)r > ; there will e lending even if investors cannot tell good tye from ad. Contract: { R, S R } what the orrower gets if success, failure. Breakeven constraint of outside investors: m(r S S R ) + (1 m)(r R ) = Exected rofit of a good orrower: R + (1 ) R S n the otimal contract, the good orrower wants to commit all the salvage value as safe det to investors, ecause this decreases the adverse-selection rolem. o A decrease in sustain an increase in R makes the outside investors ale to S R at a rate the good orrower s rofit at a rate m m, which will increase > m m. o The equilirium contract: { R, S R } = {R R m, 0}. Tore Nilssen Economics of the irm Set 6 Slide 9
10 mlementation of the contract. o irst, a det oligation D = R. This is safe det, since the firm will always have at least R to ay its det. o Seondly, an equity issue, where shareholders get a fraction R l /R of rofits in excess of R, where mr l = D, or: R l = D m = R m Adverse selection entails cross-susidization from good to ad orrowers. ssuing det minimizes this cross-susidization and therefore minimizes the adverse-selection rolem for a good orrower. More generally, the good orrower would want to issue lowinformation-intensive claims to mitigate the adverse selection rolem. o The more sensitive the investors claims are to the orrower s rivate information, the higher returns they demand from a good orrower to cover for the losses on a ad one. o Some modifications nsurance needs for a risk-averse entrereneur: who is most needy of service the good tye or the ad tye? nformation-intensive claims are etter for value measurement, imroving incentives to create value and making it easier for the entrereneur to exit in case of a liquidity shock. f there is rivate information aout the roject riskiness, then the est solution may e some hyrid claim, such as convertile det. nvestors with market ower.. Tore Nilssen Economics of the irm Set 6 Slide 10
11 Dissiative signals Costly ways for the good orrower to searate from ad ones without having to astain from investment altogether. Disclosure of verifiale information. Certification: uying the services of a certification agency, such as a rating agency, an auditor, etc. o Suose mr >, so that the good orrower gets funding, ut is concerned y cross-susidization. o Without certification, orrower gets R in case of success, where m(r R ) =, so that R = R. m o Certification costs c, needs to e covered out of the investment. o Bad orrower would never uy certification. o With certification, good orrower gets return G (R R ) = + c. G R, where o Good orrower uys certification if and only if G R > R R + c > R m c + c < χ o Certification ays off if its costs are small relative to the extent of the adverse-selection rolem. Collateral as a costly signal of rivate information o A good-tye orrower may use collateral in order to tell the outside investors aout her tye. t is more exensive for a ad tye to ledge collateral, since the roaility of failure, and therefore loss of the collateral, is greater for the ad tye than for the good tye. Tore Nilssen Economics of the irm Set 6 Slide 11
12 o Suose that without rivate information, even the ad-tye would receive funding: qr > 0; and a collateral of value C to the firm only returns βc to an outside investor, where 0 β < 1. o Contract with collateral: {R, C}. o The good-tye orrower maximizes her exected rofit suject to two constraints: reakeven among investors, and a mimicking constraint stating that it is etter for a ad-tye orrower not to offer this contract, even if this reveals her tye, than to mimic the good tye and suffer the risk of losing the collateral. o ormally, the good-tye orrower solves max R ( )C { R, C} suject to (R R ) + (1 )βc qr (1 q)c qr o Both constraints are inding in equilirium. The solution is found y solving the equation system where oth constraints hold with equality: { R *,C * } = {R β q βq q Tore Nilssen Economics of the irm Set 6 Slide 12, 1+ ( β ) 1 q q * o Here, R > R (/), the good orrower s return in case of success without rivate information. The equilirium contract with rivate information makes use of oth the ad-tye orrower s greater concern for losing collateral and her smaller interest in return if success. }
13 o Determinants of collateral: C* = 1+ ( β ) 1 q q Cheaer collateral imlies that more collateral needs to e ledged: C*/ β > 0. f the cost of collateral decreases, in the sense that βc (the outsiders valuation of the collateral) gets closer to C (the orrower s valuation), then the good-tye orrower needs to rovide more collateral in order to scare off the ad tye. The stronger the asymmetry of information is, the more collateral is needed: C*/ q < 0. ixing the quality of the good tye,, outsiders get more concerned aout the orrower s tye when q is small. o Testale imlication: good firms ledge more collateral than ad firms. The oosite imlication of what the moral-hazard theory has. Emirical studies exist suorting moral hazard as an information-ased exlanation for collateral. o Other ways of signalling a firm s high quality to investors: More short-term det than called for without rivate information aout the roaility of reinvestment needs. This reduces the good (low-roaility) firm s chances of continuation, ut increases its return in the event of continuation and eventual success. More dividend aid out than otherwise called for, in order to signal a firm s strength. Tore Nilssen Economics of the irm Set 6 Slide 13
Diversification: more than one project. It may be beneficial for a firm, in terms of getting hold of external funds, to have several projects.
Further determinants of orrowing caacity: oosting ledgeale income Diversification: more than one roject Collateral: ledging real assets Liquidity: a first look uman caital Diversification It may e eneficial
More informationCorporate Finance: Credit rationing. Yossi Spiegel Recanati School of Business
Cororate Finance: Credit rationing Yossi Siegel ecanati School of usiness Tirole 006 The Theory of Cororate Finance The model The timing: Period 0 Period 1 Period n entrereneur has dollars and needs to
More informationAdverse Selection and Costly External Finance
Adverse Selection and Costly External Finance This section is based on Chapter 6 of Tirole. Investors have imperfect knowledge of the quality of a firm s collateral, etc. They are thus worried that they
More informationWe are going to delve into some economics today. Specifically we are going to talk about production and returns to scale.
Firms and Production We are going to delve into some economics today. Secifically we are going to talk aout roduction and returns to scale. firm - an organization that converts inuts such as laor, materials,
More informationNon-Exclusive Competition and the Debt Structure of Small Firms
Non-Exclusive Cometition and the Debt Structure of Small Firms Aril 16, 2012 Claire Célérier 1 Abstract This aer analyzes the equilibrium debt structure of small firms when cometition between lenders is
More informationThe Optimal Choice of Monetary Instruments The Poole Model
The Optimal Choice of Monetary Instruments The Poole Model Vivaldo M. Mendes ISCTE Lison University Institute 06 Novemer 2013 (Vivaldo M. Mendes) The Poole Model 06 Novemer 2013 1 / 27 Summary 1 Tools,
More informationU. Carlos III de Madrid CEMFI. Meeting of the BIS Network on Banking and Asset Management Basel, 9 September 2014
Search hfor Yield David Martinez-MieraMiera Rafael Reullo U. Carlos III de Madrid CEMFI Meeting of the BIS Network on Banking and Asset Management Basel, 9 Setember 2014 Motivation (i) Over the ast decade
More informationAsymmetric Information
Asymmetric Information Econ 235, Sring 2013 1 Wilson [1980] What haens when you have adverse selection? What is an equilibrium? What are we assuming when we define equilibrium in one of the ossible ways?
More informationA Robustness Check on Debt and the Pecking Order Hypothesis with Asymmetric Information
nternational Journal o conomics and Finance; Vol. 8, No. 6; 6 SSN 96-97 -SSN 96-978 Published by Canadian Center o Science and ducation Robustness Check on Debt and the Pecking Order yothesis with symmetric
More informationMarket Failure: Asymmetric Information
Market Failure: Asymmetric Information Ram Singh Microeconomic Theory Lecture 22 Ram Singh: (DSE) Asymmetric Information Lecture 22 1 / 14 Information and Market Transactions Examples Individuals buy and
More informationAnalysis on Mergers and Acquisitions (M&A) Game Theory of Petroleum Group Corporation
DOI: 10.14355/ijams.2014.0301.03 Analysis on Mergers and Acquisitions (M&A) Game Theory of Petroleum Grou Cororation Minchang Xin 1, Yanbin Sun 2 1,2 Economic and Management Institute, Northeast Petroleum
More informationQuantitative Aggregate Effects of Asymmetric Information
Quantitative Aggregate Effects of Asymmetric Information Pablo Kurlat February 2012 In this note I roose a calibration of the model in Kurlat (forthcoming) to try to assess the otential magnitude of the
More informationMultiple-Project Financing with Informed Trading
The ournal of Entrereneurial Finance Volume 6 ssue ring 0 rticle December 0 Multile-Project Financing with nformed Trading alvatore Cantale MD nternational Dmitry Lukin New Economic chool Follow this and
More informationBoğaziçi University Department of Economics Spring 2017 EC 206 MICROECONOMICS II Problem Set 9 - Solutions
Boğaziçi University Deartment of Economics Sring 2017 EC 206 MICOECOOMICS II Problem Set 9 - Solutions 1. For the game below find the set of ooling and searating PBE s. (he first ayoff value is for the
More informationNr Capital Adequacy Requirements and the Bank Lending Channel of Monetary Policy
Nr. 391 Capital Adequacy Requirements and the Bank Lending Channel of Monetary Policy Dr. Andreas Gontermann Institut für Volkswirtschaftslehre Universität Regensurg 93040 Regensurg Telefon: 0941 / 943
More informationNBER WORKING PAPER SERIES INEFFICIENT PROVISION OF LIQUIDITY. Oliver D. Hart Luigi Zingales. Working Paper
NBER WORKING PAPER SERIES INEFFICIENT PROVISION OF LIQUIDITY Oliver D. Hart Luigi Zingales Working Paer 799 htt://www.ner.org/aers/w799 NATIONAL BUREAU OF ECONOMIC RESEARCH 050 Massachusetts Avenue Camrige,
More informationMicroeconomics II. CIDE, Spring 2011 List of Problems
Microeconomics II CIDE, Spring 2011 List of Prolems 1. There are three people, Amy (A), Bart (B) and Chris (C): A and B have hats. These three people are arranged in a room so that B can see everything
More informationInformed Principals in the Credit Market when Borrowers and Lenders Are Heterogeneous
ISSN 2282-6483 Informed rincials in the Credit Market when Borrowers and Lenders re Heterogeneous Francesca Barigozzi iero Tedeschi Quaderni - Working aer DSE N 1051 Informed rincials in the Credit Market
More informationInformal Lending and Entrepreneurship
Informal Lending and Entrereneurshi Pinar Yildirim Geyu Yang Abstract How does the informal economy affect financial inclusion and entrereneurial activity of consumers? We investigate the imact of informal
More informationInteraction between Modes of Credit Contract Enforcement
nteraction etween Modes of Credit Contract Enforcement Claire Morrison Sumitted to the Deartment of Economics of Amherst College n artial fulfillment of the requirements for the degree of Bachelor of Arts
More informationCorporate Financial Management. Lecture 3: Other explanations of capital structure
Corporate Financial Management Lecture 3: Other explanations of capital structure As we discussed in previous lectures, two extreme results, namely the irrelevance of capital structure and 100 percent
More informationSummary of the Chief Features of Alternative Asset Pricing Theories
Summary o the Chie Features o Alternative Asset Pricing Theories CAP and its extensions The undamental equation o CAP ertains to the exected rate o return time eriod into the uture o any security r r β
More informationRisk and Return. Calculating Return - Single period. Calculating Return - Multi periods. Uncertainty of Investment.
Chater 10, 11 Risk and Return Chater 13 Cost of Caital Konan Chan, 018 Risk and Return Return measures Exected return and risk? Portfolio risk and diversification CPM (Caital sset Pricing Model) eta Calculating
More informationby open ascending bid ("English") auction Auctioneer raises asking price until all but one bidder drops out
Auctions. Auction off a single item (a) () (c) (d) y open ascending id ("English") auction Auctioneer raises asking price until all ut one idder drops out y Dutch auction (descending asking price) Auctioneer
More informationSupplemental Material: Buyer-Optimal Learning and Monopoly Pricing
Sulemental Material: Buyer-Otimal Learning and Monooly Pricing Anne-Katrin Roesler and Balázs Szentes February 3, 207 The goal of this note is to characterize buyer-otimal outcomes with minimal learning
More informationInformational Frictions and Financial Intermediation. Prof. Irina A. Telyukova UBC Economics 345 Fall 2008
Informational Frictions and Financial Intermediation Prof. Irina A. Telyukova UBC Economics 345 Fall 2008 Agenda We are beginning to study banking and banking regulation. Banks are a financial intermediaries.
More informationFUNDAMENTAL ECONOMICS - Economics Of Uncertainty And Information - Giacomo Bonanno ECONOMICS OF UNCERTAINTY AND INFORMATION
ECONOMICS OF UNCERTAINTY AND INFORMATION Giacomo Bonanno Deartment of Economics, University of California, Davis, CA 9566-8578, USA Keywords: adverse selection, asymmetric information, attitudes to risk,
More informationBounded Rationality in Laboratory Bargaining with Asymmetric Information
Bounded Rationality in Laoratory Bargaining with Asymmetric Information Timothy N. Cason and Stanley S. Reynolds * Deartment of Economics, Krannert School of Management, Purdue University, West Lafayette,
More informationProblem Set #5 Solutions Public Economics
Prolem Set #5 Solutions 4.4 Pulic Economics DUE: Dec 3, 200 Tax Distortions This question estalishes some asic mathematical ways for thinking aout taxation and its relationship to the marginal rate of
More informationBounded Rationality in Laboratory Bargaining with Asymmetric Information *
Bounded Rationality in Laoratory Bargaining with Asymmetric Information * Timothy N. Cason and Stanley S. Reynolds Decemer 003 Summary. This aer reorts an exeriment on two-layer seuential argaining with
More informationCapital, Systemic Risk, Insurance Prices and Regulation
Caital, Systemic Risk, Insurance Prices and Regulation Ajay Subramanian J. Mack Robinson College of Business Georgia State University asubramanian@gsu.edu Jinjing Wang J. Mack Robinson College of Business
More informationProfessor Huihua NIE, PhD School of Economics, Renmin University of China HOLD-UP, PROPERTY RIGHTS AND REPUTATION
Professor uihua NIE, PhD School of Economics, Renmin University of China E-mail: niehuihua@gmail.com OD-UP, PROPERTY RIGTS AND REPUTATION Abstract: By introducing asymmetric information of investors abilities
More informationRevision Lecture Microeconomics of Banking MSc Finance: Theory of Finance I MSc Economics: Financial Economics I
Revision Lecture Microeconomics of Banking MSc Finance: Theory of Finance I MSc Economics: Financial Economics I April 2005 PREPARING FOR THE EXAM What models do you need to study? All the models we studied
More informationInvestor monitoring. Tore Nilssen Corporate Governance Set 8 Slide 1
Investor monitoring Comparative corporate governance o The Anglo-Saxon model: A well-developed stock market, strong investor protection, disclosure requirements, shareholder activism, takeovers. May suffer
More informationIs It Too Late to Bail Out the Troubled Countries in the Eurozone?
Federal Reserve Bank of Minneapolis Research Department Staff Report 497 Feruary 2014 Is It Too Late to Bail Out the Trouled Countries in the Eurozone? Juan Carlos Conesa Stony Brook University Timothy
More informationWhere do securities come from
Where do securities come from We view it as natural to trade common stocks WHY? Coase s policemen Pricing Assumptions on market trading? Predictions? Partial Equilibrium or GE economies (risk spanning)
More information(Some theoretical aspects of) Corporate Finance
(Some theoretical aspects of) Corporate Finance V. Filipe Martins-da-Rocha Department of Economics UC Davis Chapter 2. Outside financing: Private benefit and moral hazard V. F. Martins-da-Rocha (UC Davis)
More information(Some theoretical aspects of) Corporate Finance
(Some theoretical aspects of) Corporate Finance V. Filipe Martins-da-Rocha Department of Economics UC Davis Part 6. Lending Relationships and Investor Activism V. F. Martins-da-Rocha (UC Davis) Corporate
More informationInformation and uncertainty in a queueing system
Information and uncertainty in a queueing system Refael Hassin December 7, 7 Abstract This aer deals with the effect of information and uncertainty on rofits in an unobservable single server queueing system.
More informationInefficient provision of liquidity
Inefficient rovision of liquiity Oliver art arvar University & NBER an uigi Zingales* University of Chicago, NBER & CEPR January 0 (First Version March 0) Astract We stuy an economy where the lack of a
More informationBanking, Liquidity Transformation, and Bank Runs
Banking, Liquidity Transformation, and Bank Runs ECON 30020: Intermediate Macroeconomics Prof. Eric Sims University of Notre Dame Spring 2018 1 / 30 Readings GLS Ch. 28 GLS Ch. 30 (don t worry about model
More informationProfessor Christina Romer LECTURE 7 COMPETITIVE FIRMS IN THE LONG RUN FEBRUARY 6, 2018
Economics 2 Spring 2018 rofessor Christina Romer rofessor David Romer LECTURE 7 COMETITIVE FIRMS IN THE LONG RUN FEBRUARY 6, 2018 I. A LITTLE MORE ON SHORT-RUN ROFIT-MAXIMIZATION A. The condition for short-run
More informationPrinceton University. Updates:
Princeton University Udates: htt://www.rinceton.edu/~markus/research/aers/i_theory_slides.df Motivation Main features Unified framework to study financial and monetary stability Model that combines money
More informationChapter Eleven. Chapter 11 The Economics of Financial Intermediation Why do Financial Intermediaries Exist
Chapter Eleven Chapter 11 The Economics of Financial Intermediation Why do Financial Intermediaries Exist Countries With Developed Financial Systems Prosper Basic Facts of Financial Structure 1. Direct
More informationOliver Hinz. Il-Horn Hann
REEARCH ARTICLE PRICE DICRIMINATION IN E-COMMERCE? AN EXAMINATION OF DYNAMIC PRICING IN NAME-YOUR-OWN PRICE MARKET Oliver Hinz Faculty of Economics and usiness Administration, Goethe-University of Frankfurt,
More informationUncertainty. The St. Petersburg Paradox. Managerial Economics MBACatólica
Fernando Branco 2006-2007 Fall Quarter Session 9 Part II Uncertainty Most managerial decisions are taken under uncertainty. Some markets trade on the basis of uncertainty (e.g., insurance, stock market).
More informationFCF t. V = t=1. Topics in Chapter. Chapter 16. How can capital structure affect value? Basic Definitions. (1 + WACC) t
Topics in Chapter Chapter 16 Capital Structure Decisions Overview and preview of capital structure effects Business versus financial risk The impact of debt on returns Capital structure theory, evidence,
More informationInterest Rates in Trade Credit Markets
Interest Rates in Trade Credit Markets Klenio Barbosa Humberto Moreira Walter Novaes December, 2009 Abstract Desite strong evidence that suliers of inuts are informed lenders, the cost of trade credit
More informationEconomia Finanziaria e Monetaria
Economia Finanziaria e Monetaria Lezione 11 Ruolo degli intermediari: aspetti micro delle crisi finanziarie (asimmetrie informative e modelli di business bancari/ finanziari) 1 0. Outline Scaletta della
More informationProblem Set 2. Theory of Banking - Academic Year Maria Bachelet March 2, 2017
Problem Set Theory of Banking - Academic Year 06-7 Maria Bachelet maria.jua.bachelet@gmai.com March, 07 Exercise Consider an agency relationship in which the principal contracts the agent, whose effort
More informationLaying off Credit Risk: Loan Sales versus Credit Default Swaps
Laying off Credit Risk: Loan Sales versus Credit Default Swaps Christine A. Parlour Andrew Winton May 12, 2010 Astract After making a loan, a ank finds out if the loan needs contract enforcement ( monitoring
More information1 < = α σ +σ < 0. Using the parameters and h = 1/365 this is N ( ) = If we use h = 1/252, the value would be N ( ) =
Chater 6 Value at Risk Question 6.1 Since the rice of stock A in h years (S h ) is lognormal, 1 < = α σ +σ < 0 ( ) P Sh S0 P h hz σ α σ α = P Z < h = N h. σ σ (1) () Using the arameters and h = 1/365 this
More informationBBK3253 Risk Management Prepared by Dr Khairul Anuar
BBK3253 Risk Management Prepared by Dr Khairul Anuar L6 - Managing Credit Risk 23-0 Content 1. Credit risk definition 2. Credit risk in the banking sector 3. Credit Risk vs. Market Risk 4. Credit Products
More informationPindyck and Rubinfeld, Chapter 17 Sections 17.1 and 17.2 Asymmetric information can cause a competitive equilibrium allocation to be inefficient.
Pindyck and Rubinfeld, Chapter 17 Sections 17.1 and 17.2 Asymmetric information can cause a competitive equilibrium allocation to be inefficient. A market has asymmetric information when some agents know
More informationInterest Rates, Market Power, and Financial Stability
Interest Rates, Market Power, and Financial Stability Rafael Repullo (joint work with David Martinez-Miera) Conference on Financial Stability Banco de Portugal, 17 October 2017 Introduction (i) Session
More informationVI Introduction to Trade under Imperfect Competition
VI Introduction to Trade under Imerfect Cometition n In the 1970 s "new trade theory" is introduced to comlement HOS and Ricardo. n Imerfect cometition models cature strategic interaction and roduct differentiation:
More informationPROBLEM SET 6 ANSWERS
PROBLEM SET 6 ANSWERS 6 November 2006. Problems.,.4,.6, 3.... Is Lower Ability Better? Change Education I so that the two possible worker abilities are a {, 4}. (a) What are the equilibria of this game?
More informationDETERMINANTS OF DEBT CAPACITY. 1st set of transparencies. Tunis, May Jean TIROLE
DETERMINANTS OF DEBT CAPACITY 1st set of transparencies Tunis, May 2005 Jean TIROLE I. INTRODUCTION Adam Smith (1776) - Berle-Means (1932) Agency problem Principal outsiders/investors/lenders Agent insiders/managers/entrepreneur
More informationTheory of Capital Structure - A Review
Theory of Caital Structure - A Review Stein Frydenberg Λ Aril 29, 2004 ABSTRACT This aer is a review of the central theoretical literature. The most imortant arguments for what could determine caital structure
More informationChapter 15. Topics in Chapter. Capital Structure Decisions
Chapter 15 Capital Structure Decisions 1 Topics in Chapter Overview and preview of capital structure effects Business versus financial risk The impact of debt on returns Capital structure theory, evidence,
More informationNon-hierarchical signalling: two-stage financing game
MPRA Munich Personal RePEc Archive Non-hierarchical signalling: two-stage financing game Anton Miglo and Nikolay Zenkevich 2005 Online at http://mpra.u.uni-muenchen.de/1264/ MPRA Paper No. 1264, posted
More informationRevision Lecture. MSc Finance: Theory of Finance I MSc Economics: Financial Economics I
Revision Lecture Topics in Banking and Market Microstructure MSc Finance: Theory of Finance I MSc Economics: Financial Economics I April 2006 PREPARING FOR THE EXAM ² What do you need to know? All the
More informationAre capital expenditures, R&D, advertisements and acquisitions positive NPV?
Are caital exenditures, R&D, advertisements and acquisitions ositive NPV? Peter Easton The University of Notre Dame and Peter Vassallo The University of Melbourne February, 2009 Abstract The focus of this
More informationHow do we cope with uncertainty?
Topic 3: Choice under uncertainty (K&R Ch. 6) In 1965, a Frenchman named Raffray thought that he had found a great deal: He would pay a 90-year-old woman $500 a month until she died, then move into her
More informationMaitreesh Ghatak and Timothy W. Guinnane. The Economics of Lending with Joint Liability: Theory and Practice
The Economics of Lending with Joint Liability: Theory and Practice Maitreesh Ghatak and Timothy W. Guinnane Introduction We have looked at 3 kinds of problems in the credit markets: Adverse Selection,
More informationmarket opportunity line fair odds line Example 6.6, p. 120.
September 5 The market opportunity line depicts in the plane the different combinations of outcomes and that are available to the individual at the prevailing market prices, depending on how much of an
More informationUniversal Banking and the Equity Risk Premium
Universal ankin and the Equity Risk Premium Novemer 010 Astract: Did the unification of commercial and investment ankin heihten risk in financial markets due to moral hazard of orrowers? In a simle intertemoral
More informationFinancial Economics: Risk Aversion and Investment Decisions
Financial Economics: Risk Aversion and Investment Decisions Shuoxun Hellen Zhang WISE & SOE XIAMEN UNIVERSITY March, 2015 1 / 50 Outline Risk Aversion and Portfolio Allocation Portfolios, Risk Aversion,
More informationInstitutional Constraints and The Inefficiency in Public Investments
Institutional Constraints and The Inefficiency in Public Investments Leyla D. Karakas March 14, 017 Abstract This aer studies limits on executive authority by identifying a dynamic channel through which
More informationSchool of Economic Sciences
School of Economic Sciences Working Paer Series WP 015-10 Profit-Enhancing Environmental Policy: Uninformed Regulation in an Entry-Deterrence Model* Ana Esínola-Arredondo and Félix Muñoz-García June 18,
More informationBA 351 CORPORATE FINANCE LECTURE 7 UNCERTAINTY, THE CAPM AND CAPITAL BUDGETING. John R. Graham Adapted from S. Viswanathan
BA 351 CORPORATE FINANCE LECTURE 7 UNCERTAINTY, THE CAPM AND CAPITAL BUDGETING John R. Graham Adated from S. Viswanathan FUQUA SCHOOL OF BUSINESS DUKE UNIVERSITY 1 In this lecture, we examine roject valuation
More informationFederal Reserve Tools for Managing Rates and Reserves
Federal Reserve Tools for Managing Rates and Reserves David Skeie* Federal Reserve Bank of New York and Board of Governors of the Federal Reserve System (with Antoine Martin, James McAndrews and Ali Palida)
More informationChapter 18 Interest rates / Transaction Costs Corporate Income Taxes (Cash Flow Effects) Example - Summary for Firm U Summary for Firm L
Chapter 18 In Chapter 17, we learned that with a certain set of (unrealistic) assumptions, a firm's value and investors' opportunities are determined by the asset side of the firm's balance sheet (i.e.,
More informationParmalat FY 2009 Results
February 25 th, 2010 Parmalat FY 2009 Results Listed on the Italian Stock Exchange since October 6 th, 2005 Imortant information This resentation has been reared by Parmalat (the Comany ) for illustrative
More informationADVERSE SELECTION PAPER 8: CREDIT AND MICROFINANCE. 1. Introduction
PAPER 8: CREDIT AND MICROFINANCE LECTURE 2 LECTURER: DR. KUMAR ANIKET Abstract. We explore adverse selection models in the microfinance literature. The traditional market failure of under and over investment
More informationThe role of asymmetric information
LECTURE NOTES ON CREDIT MARKETS The role of asymmetric information Eliana La Ferrara - 2007 Credit markets are typically a ected by asymmetric information problems i.e. one party is more informed than
More informationMoral Hazard Example. 1. The Agent s Problem. contract C = (w, w) that offers the same wage w regardless of the project s outcome.
Moral Hazard Example Well, then says I, what s the use you learning to do right when it s troublesome to do right and ain t no trouble to do wrong, and the wages is just the same? I was stuck. I couldn
More informationCash-in-the-market pricing or cash hoarding: how banks choose liquidity
Cash-in-the-market ricing or cash hoarding: how banks choose liquidity Jung-Hyun Ahn Vincent Bignon Régis Breton Antoine Martin February 207 Abstract We develo a model in which financial intermediaries
More informationBuyer-Optimal Learning and Monopoly Pricing
Buyer-Otimal Learning and Monooly Pricing Anne-Katrin Roesler and Balázs Szentes January 2, 217 Abstract This aer analyzes a bilateral trade model where the buyer s valuation for the object is uncertain
More informationAuthor Name Aaron Brown Kelly Myths and Heroes
Author Name Aaron Bron Kelly Myths and Heroes A central concept in risk management, applying the Kelly criterion is in fact more of an art than a science. T he Kelly criterion gives simple remarkaly simple
More informationLecture 18 - Information, Adverse Selection, and Insurance Markets
Lecture 18 - Information, Adverse Selection, and Insurance Markets 14.03 Spring 2003 1 Lecture 18 - Information, Adverse Selection, and Insurance Markets 1.1 Introduction Risk is costly to bear (in utility
More informationBank Integration and Business Volatility
Bank Integration and Business Volatility Donald Morgan, Bertrand Rime, Phili Strahan * December 000 Abstract We investigate how bank migration across state lines over the last quarter century has affected
More informationUniversity of Toronto Department of Economics. Bid-Ask Spreads and Volume:The Role of Trade Timing
University of Toronto Department of Economics Working Paper 309 Bid-Ask Spreads and Volume:The Role of Trade Timing By Andreas Park January 30, 2008 Bid-Ask Spreads and Volume: The Role of Trade Timing
More informationPrinciples of Banking (II): Microeconomics of Banking (3) Bank Capital
Principles of Banking (II): Microeconomics of Banking (3) Bank Capital Jin Cao (Norges Bank Research, Oslo & CESifo, München) Outline 1 2 3 Disclaimer (If they care about what I say,) the views expressed
More informationDr. Syed Tahir Hijazi 1[1]
The Determinants of Capital Structure in Stock Exchange Listed Non Financial Firms in Pakistan By Dr. Syed Tahir Hijazi 1[1] and Attaullah Shah 2[2] 1[1] Professor & Dean Faculty of Business Administration
More informationECON 4335 The economics of banking Lecture 7, 6/3-2013: Deposit Insurance, Bank Regulation, Solvency Arrangements
ECON 4335 The economics of banking Lecture 7, 6/3-2013: Deposit Insurance, Bank Regulation, Solvency Arrangements Bent Vale, Norges Bank Views and conclusions are those of the lecturer and can not be attributed
More informationMathematical Annex 5 Models with Rational Expectations
George Alogoskoufis, Dynamic Macroeconomic Theory, 2015 Mathematical Annex 5 Models with Rational Expectations In this mathematical annex we examine the properties and alternative solution methods for
More informationLemons Markets and the Transmission of Aggregate Shocks
Lemons Markets and the Transmission of Aggregate Shocks Pablo Kurlat Stanford University July 21, 2011 Abstract I study a dynamic economy featuring adverse selection in asset markets. Borrowingconstrained
More informationGames with more than 1 round
Games with more than round Reeated risoner s dilemma Suose this game is to be layed 0 times. What should you do? Player High Price Low Price Player High Price 00, 00-0, 00 Low Price 00, -0 0,0 What if
More informationEconomics 101A (Lecture 25) Stefano DellaVigna
Economics 101A (Lecture 25) Stefano DellaVigna April 29, 2014 Outline 1. Hidden Action (Moral Hazard) II 2. The Takeover Game 3. Hidden Type (Adverse Selection) 4. Evidence of Hidden Type and Hidden Action
More informationFeedback Effects and Asset Prices
Feedack Effects and Asset Prices EMRE OZDENOREN and KATHY YUAN ABSTRACT Feedack effects from asset prices to firm cash flows have een empirically documented. This finding raises a question for asset pricing:
More informationImperfect Transparency and the Risk of Securitization
Imperfect Transparency and the Risk of Securitization Seungjun Baek Florida State University June. 16, 2017 1. Introduction Motivation Study benefit and risk of securitization Motivation Study benefit
More informationChapter 4 UTILITY MAXIMIZATION AND CHOICE. Copyright 2005 by South-Western, a division of Thomson Learning. All rights reserved.
Chater 4 UTILITY MAXIMIZATION AND CHOICE Coyright 2005 by South-Western, a division of Thomson Learning. All rights reserved. 1 Comlaints about the Economic Aroach No real individuals make the kinds of
More informationEx ante moral hazard on borrowers actions
Lecture 9 Capital markets INTRODUCTION Evidence that majority of population is excluded from credit markets Demand for Credit arises for three reasons: (a) To finance fixed capital acquisitions (e.g. new
More informationSCREENING BY THE COMPANY YOU KEEP: JOINT LIABILITY LENDING AND THE PEER SELECTION EFFECT
SCREENING BY THE COMPANY YOU KEEP: JOINT LIABILITY LENDING AND THE PEER SELECTION EFFECT Author: Maitreesh Ghatak Presented by: Kosha Modi February 16, 2017 Introduction In an economic environment where
More informationLawrence J. Christiano
Three Financial Friction Models Lawrence J. Christiano Motivation Beginning in 2007 and then accelerating in 2008: Asset values collapsed. Intermediation slowed and investment/output fell. Interest rates
More informationSupply From A Competitive Industry
Industry Suly Suly From A Cometitive Industry How are the suly decisions of the many individual firms in a cometitive industry to be combined to discover the market suly curve for the entire industry?
More informationEconomic growth and stationarity of real exchange rates: Evidence from some fast-growing Asian countries
Ž. Pacific-Basin Finance Journal 6 1998 61 76 Economic growth and stationarity of real exchange rates: Evidence from some fast-growing Asian countries Yin-Wong Cheung a,), Kon S. Lai a Deartment of Economics,
More informationTHEORETICAL ASPECTS OF THREE-ASSET PORTFOLIO MANAGEMENT
THEORETICAL ASPECTS OF THREE-ASSET PORTFOLIO MANAGEMENT Michal ŠOLTÉS ABSTRACT: The aer deals with three-asset ortfolio It focuses on ordinary investor for whom the Marowitz s theory of selection of otimal
More informationENDOGENOUS TIMING IN A MIXED DUOPOLY: WEIGHTED WELFARE AND PRICE COMPETITION
ENDOGENOU TIMING IN A MIXED DUOPOY: WEIGHTED WEFARE AND PRICE COMPETITION y Juan Carlos Bárcena-Ruiz and Máximo edano 0 Working Paper eries: I. 6/ Departamento de Fundamentos del Análisis Económico I Ekonomi
More information