sustainable development and corporate performance a study based on the dow jones sustainability index the goal of this paper is to examine whether business performance is affected by the adoption of practices included under the term corporate social responsibility csr to achieve this goal we analyse the relation between csr and certain accounting indicators and examine whether there exist significant differences in performance indicators between european firms that have adopted csr and others that have not the effects of compliance with the requirements of csr were determined on the basis of firms included in the dow jones sustainability index djsi and specific accounting indicators were applied to measure performance for the purposes of this study we selected one group of firms belonging to the djsi and another comprised of firms quoted on the dow jones global index djgi but not on the djsi the sample was made up of two groups of 55 firms studied for the period 1998 2004 empirical analysis supports the conclusion that differences in performance exist between firms that belong to the djsi and to the djgi and that these differences are related to csr practices we find that a short term negative impact on performance is produced

the value relevance of reputation for sustainability leadership this study investigates whether the market valuation of the two summary accounting measures book value of equity and net income is higher for firms with reputation for sustainability leadership when compared to firms that do not enjoy such reputation the results are interpreted through the lens of a framework combining signalling theory and resource based theory according to which firms signal their commitment to sustainability to influence the external perception of reputation a firm s reputation for being committed to sustainability is an intangible resource that can increase the value of a firm s expected cash flows and or reduce the variability of its cash flows our findings are according to expectations and show that the net income of firms with good sustainability reputation has a higher valuation by the market when compared to their counterparts

estimating the effect of hierarchies on information use theory suggests that greater hierarchical distance between a subordinate and his boss makes it more di cult to share abstract and subjective information in decision making a novel data set put together from credit dossiers of large corporate loan applicants enables us to observe the information collected by loan o cers and also how it is used by the ultimate loan approving o cer we flnd that greater hierarchical geographical distance between the information collecting agent and the loan approving o cer leads to less reliance on subjective information and more on objective information by exploiting non linearities in the assignment rules that determine an applicant s hierarchical distance and using information collecting agent flxed efiects we show that our result cannot be driven by endogenous assignment of applicants we also flnd that higher frequency of interactions between the information collecting agent and loan approving o cer both over time and through geographical proximity helps mitigate the efiects of hierarchical distance on information use our results show that hierarchical distance in uences information use and highlights the importance of human touch in communication

contracts as a barrier to entry it is shown that an incumbent seller who faces a threat of entry into his or her market will sign long term contracts that prevent the entry of some lower cost producers even though they do not preclude entry completely moreover when a seller possesses superior information about the likelihood of entry it is shown that the length of the contract may act as a signal of the true probability of entry

technology is changing lending implications for research abstract costello down and mehta 2020 trace their slider intervention to deviations from the credit line amount recommended by a credit scoring model the deviations are followed by larger delinquency declines and bigger sales orders and costello et al interpret these results using discretion based theories however incremental deviations are concentrated on newer clients rather than those the lender has accumulated soft information about deviations also appear larger for public than private borrowers my discussion evaluates whether these results align with discretion based theories and explores alternative interpretations based on salience and unique aspects of the trade credit setting differences in interpretation aside the evidence is informative about technological advances in commercial lending i conclude with an overview of several recent advances and discuss the implications for lending research

two remarks on the property rights literature we first point out that the recent property rights literature is based on three assumptions 1 that contracts are always subject to renegotiation 2 that the exercise of a property right confers a private benefit and 3 that parties are risk neutral building on hart moore 1999 we provide conditions under which an optimal contract consists of nothing more than an assignment of property rights we also examine the robustness of some of the literature s standard predictions about asset ownership to the introduction of mechanisms for eliciting parties ex post willingness to pay for the assets such as options or financial markets to illustrate the issue we revisit the hart moore 1990 proposition that joint ownership is suboptimal and argue that ownership by a single party is dominated by joint ownership with put options

investments holdup and the form of market contracts the authors analyze incomplete contracts to induce efficient investment with exogenous switching costs fixed price contracts are efficient generate some rigidity in prices are renegotiated intermittently by possibly small amounts and when inflation is positive generate asymmetric responses to shocks all consistent with evidence on prices and wages with two sided specific investments efficiency requires prices to have sufficient escalator clauses to avoid renegotiation as observed in many long term contracts a third case with one sided specific investments can generate take or pay contracts and explain why firms sometimes pay for specific investments that appear to benefit employees directly

unforeseen contingencies and incomplete contracts we scrutinize the conceptual framework commonly used in the incomplete contract literature this literature usually assumes that contractual incompleteness is due to the transaction costs of describing or of even foreseeing the possible states of nature in advance we argue however that such transaction costs need not interfere with optimal contracting i e transaction costs need not be relevant provided that agents can probabilistically forecast their possible future payoffs even if other aspects of the state of the nature cannot be forecast in other words all that is required for optimality is that agents be able to perform dynamic programming an assumption always invoked by the incomplete contract literature the foregoing optimality result holds very generally provided that parties can commit themselves not to renegotiate moreover we point out that renegotiation may be hard to reconcile with a framework that otherwise presumes perfect rationality however even if renegotiation is allowed the result still remains valid provided that parties are risk averse

wall street and the housing bubble we analyze whether mid level managers in securitized finance were aware of the housing bubble and a looming crisis in 2004 2006 using their personal home transaction data we find little evidence of them timing the bubble or exercising cautious behavior in purchasing homes relative to two uninformed control groups one composed of non housing equity analysts and the other of non real estate lawyers to the extent that the practice of securitization may have led to lax screening of subprime borrowers the average person in our sample did not expect it to lead to problems in the wider housing market our findings suggest the need to expand the incentives based view of the crisis to incorporate a role for distorted beliefs

incomplete contracts and strategic ambiguity why are observed contracts so often incomplete in the sense that they leave contracting parties obligations vague or unspecified traditional answers to this question invoke transaction costs or bounded rationality in contrast the authors argue that such incompleteness is often an essential feature of a well designed contract specifically once some aspects of performance are unverifiable it is often optimal to leave other verifiable aspects of performance unspecified the authors explore the conditions under which this occurs and investigate the structure of optimal contracts when these conditions are satisfied copyright 1998 by american economic association

skin in the game and moral hazard what determines securitization levels and should they be regulated to address these questions we develop a model where originators can exert unobservable effort to increase expected asset quality subsequently having private information regarding quality when selling abs to rational investors absent regulation originators may signal positive information via junior retentions or commonly adopt low retentions if funding value and price informativeness are high effort incentives are below first best absent regulation optimal regulation promoting originator effort entails a menu of junior retentions or one junior retention with size decreasing in price informativeness zero retentions and opacity are optimal among regulations inducing zero effort

delinquency model predictive power among low documentation loans abstract using data from a major mortgage bank we examine the predictive power of mortgage delinquency models as an aggregate measure of the quality of information recorded at loan origination we measure model predictive power using an out of sample prediction criterion and compare predictive power of delinquency models over time and across loans of different documentation levels and origination channels we found that model predictive power declined over time throughout the housing boom further predictive power is attenuated in delinquency models for low documentation loans providing suggestive evidence that loan and borrower characteristics used in the delinquency predictions may be inaccurate or falsified for such loans we do not find differences in model predictive power when comparing bank versus third party broker originated loans

lender screening and the role of securitization evidence from prime and subprime mortgage markets this article examines the link between mortgage securitization and lender screening during the boom and bust of the u s housing market using comprehensive data on both prime and subprime securitized and bank held loans we provide evidence that securitization affected lenders screening decisions in the subprime market for low documentation loans through two channels the securitization rate and the time it takes to securitize a loan the change in decision making by subprime lenders occurs on dimensions that are unreported to investors examining the time series evolution of the securitization market further reinforces these findings we exploit heterogeneity across subprime and prime markets to illustrate that the potential for moral hazard may be reduced with greater collection of hard information and increased monitoring of lenders our results suggest that the policy debate regarding securitization and lenders underwriting standards should separately evaluate the agency and non agency markets with special attention toward the extent of soft information in assets being securitized the author 2012 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

building institutions based on information disclosure lessons from gri s sustainability reporting abstract global reporting initiative gri is the best known framework for voluntary reporting of environmental and social performance by business worldwide using extensive empirical data including interviews and documentary analysis we examine gri s organizational field and conclude that since its modest beginnings in 1999 gri has been by several measures a successful institutionalization project but the institutional logic of this new entity as an instrument for corporate sustainability management leaves out one of the central elements of the initial vision for gri as a mobilizing agent for many societal actors this emergent logic reflects gri s dominant constituency large global companies and financial institutions and international business management consultancies and not the less active civil society organizations and organized labor we attribute these developments to factors such as building gri within the existing institutional structures the highly inclusive multistakeholder process and the underdeveloped base of information users from the institutional theory perspective this case shows how the process of institutionalization is deeply affected by initial strategies of the founders and how it reproduces existing power relations from the governance perspective this case leads us to question the power of commodified information to mobilize civil society and to strengthen governance based on partnerships

how can a ratings based method for assessing corporate social responsibility csr provide an incentive to firms excluded from socially responsible investment indices to invest in csr socially responsible investment sri indices play a major role in the stock markets a connection between doing good and doing well in business is implied leading indices such as the domini social index and others exemplify the movement toward investing in socially responsible corporations however the question remains does the ratings based methodology for assessing corporate social responsibility csr provide an incentive to firms excluded from sri indices to invest in csr not in its current format the ratings based methodology employed by sri indices in their selection processes excludes many corporations by creating limited membership lists this received ratings based structure is yet to offer an incentive for most of the excluded corporations to invest in improving their levels of csr we therefore ask under what circumstances a ratings based method for assessing csr could provide an incentive to firms excluded from sri indices to invest in csr in this article we attempt to offer a theoretical reply to this question we show that when all firms are publicly ranked according to sri index parameters such indices can indeed create a market incentive for increased investment by firms in improving their performance in the area of social responsibility we further show that this incentive tapers off as the amount of investment required exceeds a certain point or if the amount of payback on that investment fails to reach a certain threshold

misselling through agents this paper analyzes the implications of the inherent conflict between two tasks performed by direct marketing agents prospecting for customers and advis ing on the product s suitability for the specific needs of customers when structuring salesforce compensation firms trade off the expected losses from misselling unsuitable products with the agency costs of providing market ing incentives we characterize how the equilibrium amount of misselling and thus the scope of policy intervention depends on features of the agency problem including the internal organization of a firm s sales process the transparency of its commission structure and the steepness of its agents sales incentives jel m31 m37 m52 when purchasing unfamiliar products consumers often rely on information and advice pro vided by representatives of the seller this creates the possibility of misselling the question able practice of a salesperson selling a product that may not match a customer s specific needs 1 this problem is particularly severe in markets for technically complex products such as con sumer electronics auto repairs medical care and retail financial services including securities pensions insurance policies and mortgages an important feature of these markets is that the seller often deals with the customer through an agent rather than directly for example financial brokers typically recommend purchase of a specific product after inquiring about their customers particular circumstances and needs the possibility of abuse has led to regulation in some of these markets most notably for securities transactions the financial industry regulatory authority finra the major self regulatory organization for securities firms operating in the united states mandates that broker dealers make a reasonable effort to obtain information about the individual characteristics of their noninstitutional cus tomers and to ensure that their recommendations are suitable to customers financial situations

assessment of environmental responsibility of oil and gas companies in russia the rating method abstract the article analyzes preconditions specifics and results of the first russian environmental rating of oil and gas companies the russian oil and gas industry strategically important for the national economy is also environmentally unfriendly and opaque companies lack adequate motivation to follow best international environmental standards and practices for disclosure of information about their environmental performance and impacts environmental responsibility of the oil and gas sector has been subject to both public scrutiny and scientific discussions for many decades however these issues have been rarely if ever explored using a reliable and equitable tool which would provide for comparison between different companies this article attempts to analyze the application of such a tool environmental responsibility rating of oil and gas companies in russia the idea behind launching the rating was to provide end consumers and financial institutions an opportunity to compare the companies products and services and to evaluate corporate risks including reputation on the basis of unbiased comparison and evaluation of the companies environmental responsibility and their management s commitment the rating s rationale is premised on the assumption that an environmental rating based on publicly available data and information could be accepted by companies top management as a competitive advantage or disadvantage in obtaining access to better cheaper and long term financial resources and in improving market demand for their final value added products this study offers a complex analysis of qualitative and quantitative indicators of companies activities in three fields environmental management environmental impact and disclosure transparency the rating s results demonstrate that there are big differences among russian oil and gas companies in their levels of environmental responsibility and transparency large publicly traded companies with a strategic focus on gas have received top ratings privately held smaller oil companies are at the bottom along with the subsidiaries of major russian and international corporations transparency of subsidiary companies tends to be lower than that of parent corporations in some cases a close relationship between the company s management and population of the surrounding region plays a positive role in promoting environmental responsibility assumptions for this environmental rating have been at least partially confirmed by the positive dynamics of the associated petroleum gas apg utilization level by oil and gas companies in russia this rating is based on novel and creative approach and has already contributed to forming average quantitative impact indicators in the industry the assumptions and conclusions of this study can also be tested by comparing the first environmental rating of oil and gas companies data with the data produced in the next rating

contract duration and relationship specific investments empirical evidence from coal markets this paper examines the importance of specific relationship investments in determining the duration of coal contracts negotiated between coal suppliers and electric utilities data for 277 coal contracts are used to perform the analysis the results provide strong support for the view that buyers and sellers make longer commitments to the terms of future trade at the contract execution stage and rely less on repeated bargaining when relationship specific investments are more important

the role of exchange rate in inflation targeting the case of turkey the role of the exchange rates in emerging market economies that have adopted inflation targeting it is a critical and contentious issue in the relevant literature this article investigates whet

bank integration and co movements across housing markets this paper investigates whether bank integration measured by cross border bank flows can capture the co movements across housing markets in developed countries by using a spatial dynamic panel model the transmission can occur through a global banking channel in which global banks intermediate wholesale funding to local banks changes in financial conditions are passed across borders through the banks balance sheet exposure to credit currency maturity and funding risks resulting in house price spillovers while controlling for country level and global factors we find significant co movement across housing markets of countries with proportionally high bank integration bank integration can better capture house price co movements than other measures of economic integration once we account for bank exposure other spatial linkages traditionally used to account for return co movements across region such as trade foreign direct investment portfolio investment geographic proximity etc become insignificant moreover we find that the co movement across housing markets decreases for countries with less developed mortgage markets characterized by fixed mortgage rate contracts low limits of loan to value ratios and no mortgage equity withdrawal

rating the raters are reputation concerns powerful enough to discipline rating agencies abstract credit rating agencies cras are accused of bearing a strong responsibility for contributing to the subprime crisis by having been deliberately too lax in the ratings of some structured products in response to this accusation cras argue that such an attitude would be too dangerous for them since their reputation is at stake the objective of this article is to examine the validity of this argument within a formal model are reputation concerns sufficient to discipline rating agencies we show that the reputation argument only works when a sufficiency large fraction of the cra income comes from other sources than rating complex products by contrast when rating complex products becomes a major source of income for the cra we show that it is always too lax with a positive probability and inflates ratings with probability one when its reputation is good enough we provide some empirical support for this prediction by showing that ceteris paribus the proportion of subprime residential mortgage backed securities rmbs that were rated aaa by the three main cras indeed increased over the last eight years we analyze the policy implications of our findings and advocate for a new business model of cras that we call the platform pays model

regulating a model abstract we study a situation in which a regulator relies on risk models that banks produce in order to regulate them a bank can generate more than one model and choose which models to reveal to the regulator the regulator can find out the other models by monitoring the bank but in equilibrium monitoring induces the bank to produce less information we show that a high level of monitoring is desirable when the bank s private gain from producing more information is either sufficiently high or sufficiently low when public models are more precise banks produce more information but the regulator may end up monitoring more

cooperative investments and the value of contracting recent articles have shown that contracts can support the efficient outcome for bilateral trade even in the face of specific investments and incomplete contracting these studies typically considered selfish investments that benefit the investor e g the seller s investment reduces her production costs the authors find very different results for cooperative investments that directly benefit the investor s partner e g the seller s investment improves the buyer s value of the good most importantly if committing not to renegotiate the contract is impossible then contracting has no value i e the parties cannot do better than to abandon contracting altogether in favor of ex post negotiation

flexible inflation targets forex interventions and exchange rate volatility in emerging countries abstract emerging economies with inflation targets it face a dilemma between fulfilling the theoretical conditions of strict it which imply a fully flexible exchange rate or applying a flexible it which entails a de facto managed floating exchange rate with foreign exchange forex interventions to moderate exchange rate volatility using a panel data model for 37 countries we find that although it lead to higher exchange rate instability than alternative regimes forex interventions in some it countries have been more effective to lower volatility than in non it countries which may justify the use of flexible it by policymakers

accuracy of mortgage portfolio risk forecasts during financial crises abstract this paper explores whether factor based credit portfolio risk models are able to predict losses in severe economic downturns such as the recent global financial crisis gfc within standard confidence levels the paper analyzes i the accuracy of default rate forecasts and ii whether forecast downturn percentiles value at risk var are sufficient to cover default rate outcomes over a quarterly and an annual forecast horizon uninformative maximum likelihood and informative bayesian techniques are compared as they imply different degrees of uncertainty we find that quarterly var estimates are generally sufficient but annual var estimates may be insufficient during economic downturns in addition the paper develops and analyzes models based on auto regressive adjustments of scores which provide a higher forecast accuracy the consideration of parameter uncertainty and auto regressive error terms mitigates the shortfall

securitization and loan performance ex ante and ex post relations in the mortgage market this study examines the relation between securitization and loan performance using a comprehensive dataset from a major national mortgage lender loans remaining on the bank s balance sheet ex post incurred higher delinquency rates than sold loans contrasting the negative relation between screening efforts and ex ante probability of loan sale explored by prior studies moreover the performance gap between sold and retained loans was wider among the subsample of loans that were perceived as easier to resell the investors seeming advantage over the originating bank can mostly be explained by information revealed during the time between loan origination and sale

approaching socially responsible investment with a comprehensive ratings scheme total social impact the socially responsible investment industry sri is slowly changing from a screening avoidance paradigm to a comprehensive paradigm that seeks to affect corporate behavior credible rating systems are a key component of this sea change reliable and recognizable social and environmental metrics are critical to this progress the total social impact tsi rating approach is a new social metric scheme based on a comprehensive rating of stakeholder issues this paper describes the evolution of sri ratings and the role that tsi hopes to play in affecting business behavior by promoting principled business leadership

incomplete written contracts undescribable states of nature this paper extends the classic two armed bandit problem to a many agent setting in which n players each face the same experimentation problem the difference with the single agent problem is that agents can now learn from the experiments of others thus experiementation produces a public good and a free rider problem in experimentation naturally arises more interestingly future experimentation by others encourages current individual experimentation the paper provides an analysis of the set of markov equilibria in terms of the free rider effect and the encouragement effect

securitization and distressed loan renegotiation evidence from the subprime mortgage crisis abstract we examine whether securitization impacts renegotiation decisions of loan servicers focusing on their decision to foreclose a delinquent loan conditional on a loan becoming seriously delinquent we find a significantly lower foreclosure rate associated with bank held loans when compared to similar securitized loans across various specifications and origination vintages the foreclosure rate of delinquent bank held loans is 3 to 7 lower in absolute terms 13 to 32 in relative terms there is a substantial heterogeneity in these effects with large effects among borrowers with better credit quality and small effects among lower quality borrowers a quasi experiment that exploits a plausibly exogenous variation in securitization status of a delinquent loan confirms these results

banks and loan sales marketing nonmarketable assets theories of financial intermediation predict that bank loans should not be marketable because of moral hazard problems banks will not conduct credit risk analysis or monitor borrowers if they are not at risk for failing to perform these services throughout most of history bank loans have not in fact been marketable yet by the end of the 1980 s the amount of commercial and industrial loan sales outstanding had grown to over 250 billion from trivial amounts at the beginning of the decade to explain the opening of this loan sales market we present a model of incentive compatible loan sales that allows for implicit contractual features between loan sellers and loan buyers we then test for the presence of these features using a sample of over 800 recent loan sales

the failure of models that predict failure distance incentives and defaults statistical default models widely used to assess default risk fail to account for a change in the relations between different variables resulting from an underlying change in agent behavior we demonstrate this phenomenon using data on securitized subprime mortgages issued in the period 1997 2006 as the level of securitization increases lenders have an incentive to originate loans that rate high based on characteristics that are reported to investors even if other unreported variables imply a lower borrower quality consistent with this behavior we find that over time lenders set interest rates only on the basis of variables that are reported to investors ignoring other credit relevant information as a result among borrowers with similar reported characteristics over time the set that receives loans becomes worse along the unreported information dimension this change in lender behavior alters the data generating process by transforming the mapping from observables to loan defaults to illustrate this effect we show that the interest rate on a loan becomes a worse predictor of default as securitization increases moreover a statistical default model estimated in a low securitization period breaks down in a high securitization period in a systematic manner it underpredicts defaults among borrowers for whom soft information is more valuable regulations that rely on such models to assess default risk could therefore be undermined by the actions of market participants

informational frictions and the credit crunch in this paper i estimate the magnitude of an informational friction limiting credit reallocation to firms during the 2007 to 2009 financial crisis because lenders rely on private information when deciding which relationship to end borrowers looking for a new lender are adversely selected i show how to separately identify private information from information common to all lenders but unobservable to the econometrician by using bank shocks within a discrete choice model of relationships quantitatively these informational frictions appear to be too small to explain the credit crunch in the u s syndicated corporate loan market

the u s and irish credit crises their distinctive differences and common features although the 2007 2008 us credit crisis precipitated it the subsequent irish credit crisis is an identifiably separate one which might have occurred in the absence of the u s crash the distinctive differences between them are notable many of the apparent causal factors of the u s crisis are missing in the irish case and the same applies vice versa at a deeper level we identify four common features of the two credit crises capital bonanzas asset price bubbles regulatory imprudence and moral hazard the particular manifestations of these four deep common features are quite different in the two cases

screening peers softly inferring the quality of small borrowers this paper examines the performance of new online lending markets that rely on nonexpert individuals to screen their peers creditworthiness we find that these peer lenders predict an individual s likelihood of defaulting on a loan with 45 greater accuracy than the borrower s exact credit score unobserved by the lenders who only see a credit category moreover peer lenders achieve 87 of the predictive power of an econometrician who observes all standard financial information about borrowers screening through soft or nonstandard information is relatively more important when evaluating lower quality borrowers our results highlight how aggregating over the views of peers and leveraging nonstandard information can enhance lending efficiency this paper was accepted by amit seru finance

credit rationing income exaggeration and adverse selection in the mortgage market we examine the role of borrower concerns about future credit availability in mitigating the effects of adverse selection and income misrepresentation in the mortgage market we show that the majority of additional risk associated with low doc mortgages originated prior to the great recession was due to adverse selection on the part of borrowers who could verify income but chose not to we provide novel evidence that these borrowers were more likely to inflate or exaggerate their income our analysis suggests that recent regulatory changes that have essentially eliminated the low doc loan product would result in credit rationing against self employed borrowers abstract from author

credit induced boom and bust this paper exploits the federal preemption of national banks in 2004 from local laws against predatory lending to gauge the effect of the supply of credit on the real economy first the preemption regulation resulted in an 11 increase in annual lending in the 2004 2006 period which is associated with a 3 3 rise in annual house price growth rate and a 2 2 expansion of employment in nontradable sectors this was followed by a sharp decline in subsequent years furthermore we show that the increase in the supply of credit reduced delinquencies during boom years but increased them in bust years received june 7 2015 editorial decision december 22 2016 by editor robin greenwood

the message and methods of ethical investment abstract this paper examines a high profile and often provocative segment of the financial industry that of ethical or socially responsible investment by offering an ethical or sustainable product which has the potential to influence so many stakeholders the financial industry is in a unique position to guide change towards corporate sustainability however what message is ethical investment really giving to companies and the financial industry are ethical investors and their rating agencies capable of effectively influencing corporations towards more sustainable patterns of production and consumption and are their approaches consistent with the principles of cleaner production this paper first gives an overview some of the definitions ethical investment and the scale of activities under this umbrella term then the actual screening methods and their application is examined a typology of the different ethical mutual funds is given and two cases of ethical funds are described robur s environmental fund and sustainable asset management s sustainability rating tool each are analysed in terms of their potential to either reveal or conceal cleaner production innovations by the firms they assess in order to ascertain where ethical investment might lead companies the effects of ethical investment on companies and back on the asset management companies themselves is explored a reflexive model of corporate and finance sector learning based on the ethical screens is proposed

issuer credit quality and the price of asset backed securities following the financial market crisis of the past few years critics and scholars have identified numerous problems related to all parties associated with securitization including investors rating agencies issuers underwriters and borrowers some of this research focuses on the rating process itself adam ashcraft paul goldsmith pinkham and james vickery 2009 show that observable credit fundamentals deteriorated relative to ratings between 2005 and 2007 efraim benmelech and jennifer dlugosz 2009 find that collateralized debt obligations cdos rated by only one rating agency are more likely both to be downgraded and to suffer more severe downgrades than cdos rated by more than one agency joshua coval jakub jurek and erik stafford 2009a point out that ratings of cdos were highly unreliable due to models that were highly sensitive to even small errors in economic projections or losses and that underestimated the correlation of risks across various debt securities other research focuses on the conflicts of interest between parties who participate in the underlying processes of originating and bundling loans and collecting payments from delinquent borrowers chris downing dwight jaffee and nancy wallace 2009 find that some residential mortgage backed securities trade in a market for lemons where originators can use private information to determine which mortgage issuer credit quality and the price of asset backed securities

distance and private information in lending we study the effects of physical distance on the acquisition and use of private information in informationally opaque credit markets using a unique data set of all loan applications by small firms to a large bank we show that borrower proximity facilitates the collection of soft information leading to a trade off in the availability and pricing of credit which is more readily accessible to nearby firms albeit at higher interest rates ceteris paribus analyzing loan rates and firms decision to switch lenders provides further evidence for banks strategic use of private information however distance erodes our lender s ability to collect proprietary intelligence and to carve out local captive markets suggesting that the requisite soft information is primarily local the author 2010 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oxfordjournals org oxford university press

global standards and ethical stock indexes the case of the dow jones sustainability stoxx index the increased scrutiny of investors regarding the non financial aspects of corporate performance has placed portfolio managers in the position of having to weigh the benefits of holding the market against the cost of having positions in companies that are subsequently found to have questionable business practices the availability of stock indexes based on sustainability screening makes increasingly viable for institutional investors the transition to a portfolio based on a socially responsible investment sri benchmark at relatively low cost the increasing share of socially responsible investments may play a role in providing incentives towards a continuous upgrading of sustainability standards to the extent that their performance is not systematically inferior to that of the other funds this article examines whether these incentives have been so far detectable with particular reference to the dow jones sustainability stoxx index djssi that focuses on the european corporations with the highest csr scores among those included in the dow jones stoxx 600 index the aim of the article is twofold first we analyse the performance of the djssi over the period 2001 2006 compared to that of the surrogate complementary index sci a new benchmark that includes only the components of the dj stoxx 600 that do not belong to the ethical index to evaluate more correctly the size of possible divergent performances second we perform an event study on the same data set to analyse whether the stock market evaluation reacts to the inclusion deletion in the djssi in both cases the results suggest that the evaluation of the csr performance of a firm is a significant criterion for asset allocation activities

a critical review of sustainable business indices and their impact most studies into the performance of socially responsible investment vehicles have focused on the performance of sustainable or socially responsible mutual funds this research has been complemented recently by a number of studies that have examined the performance of sustainable investment indices in both cases the majority of studies have concluded that the returns of socially responsible investment vehicles have either underperformed or failed to outperform comparable market indices although the impact of sustainable indices to date has been limited the recent launch of sustainable indices by dow jones and ftse suggests that more attention is being paid to the subject by financial markets investors and companies this development raises a number of important issues which are reviewed in this article a the performance of indices compared with their benchmark indices b the methodologies employed in compiling the indices and c the impact of the indices on companies and the investment community the article concludes with a number of suggestions for areas that merit future research

loan sales and the cost of bank capital this paper considers a model where banks may improve the returns on loans by monitoring borrowers bank regulation together with competitive deposit and equity financing can give banks an incentive to sell loans but the extent of their loan selling is limited by a moral hazard problem a solution is given for the optimal design of the bank loan buyer contract that alleviates this moral hazard problem an explanation is also given as to why some banks might buy loans and why loan sales volume has recently increased banks practice of making loans and then selling them to other institutions and individuals has grown in popularity an important example in the development of loan selling has been the increase in banks mortgage loans that are insured and pooled under the authority of the government national mortgage association gnma and then sold to secondary market investors recently however there has been a dramatic rise in the volume of other types of loans being sold especially by money center banks portions of commercial loans originated by these larger banks are being sold to smaller banks foreign banks and other financial and nonfinancial institutions in addition banks car loans and credit card receivables have also been pooled and sold to institutions and individuals selling loans that were once considered nonmarketable assets a process that has been termed asset securitization may be signalling the start of a fundamental change in the commercial banking business the leading banks in loan selling operations now view themselves more as originators and distributors of loans rather than as institutions holding loans as assets the potentially large impact of loan sales on the future of commercial banking naturally evokes the question of what incentives exist for banks to sell loans in this paper we show that loan sales allow some banks to finance loans less expensively than by traditional deposit or equity issue because bank funds received via loan sales can avoid costs associated with required reserves and

mortgage mis pricing the case of co borrowers abstract this paper provides evidence for a performance differential between loans with one borrower and loans with two borrowers we argue that the choice of observables considered during the rate adjustment process may lead to mortgage mispricing for loans with co borrowers our findings offer an example of borrower level information that mortgage lenders collect which is not used in pricing but is predictive of performance

the maturing of socially responsible investment a review of the developing link with corporate social responsibility this paper reviews the development of socially responsible investment sri over recent years and highlights the prospects for an increasingly strong connection with the practice of corporate social responsibility the paper argues that not only has sri grown significantly it has also matured in particular it has become an investment philosophy adopted by a growing proportion of large investment institutions this shift in sri from margin to mainstream and the position in which institutional investors find themselves is leading to a new form of sri shareholder pressure although this bears some resemblance to lobbying campaigns which might take advantage of shareholder rights we seek to distinguish it as an important phenomenon in its own right one to which corporate executives are likely to be paying increasing attention in the years to come we further argue that this approach potentially meets some of the earlier ethical criticisms of certain forms of sri but ironically probably owes its existence to those pioneering approaches we conclude with some suggestions for further research to inform discussion of the issues highlighted in the paper

identification weak instruments and statistical inference in econometrics we discuss statistical inference problems associated with identification and testability in econometrics we consider inference in non parametric models and weakly identified structural models weak instruments we point out that many ill defined statistical problems such as non testable hypotheses occur in these areas and are typically associated with asymptotic approximations in non parametric models such problems include testing moments and inference under heteroscedasticity or serial dependence of unknown form for weakly identified structural models difficulties are typically associated with improper pivots and we review recent developments aimed at proposing more reliable procedures including alternative proposed statistics bounds projection split sampling conditioning monte carlo tests jel classification c1 c12 c14 c15 c3 c5 identification instruments faibles et inference statistique en econometrie nous analysons les problemes d inference associes a l identification et a la testabilite en econometrie nous considerons l inference dans les modeles non parametriques et les modeles structurels faiblement identifies instruments faibles nous remarquons que beaucoup de problemes mal poses tels que des hypotheses non testables apparaissent dans ces domaines et que ceux ci sont typiquement associes a l emploi d approximations asymptotiques dans les modeles non parametriques de tels problemes incluent les tests sur les moments et l inference sous heteroscedasticite ou dependance serielle de forme non specifiee dans les modeles structurels faiblement identifies ces difficultes sont habituellement associees a l emploi de fonctions pivotales impropres et nous presentons un survol des methodes recentes ayant pour objectif d obtenir des procedures plus fiables ce qui comprend les differentes statistiques proposees l emploi de bornes la subdivision d echantillon les techniques de projection le conditionnement et les tests de monte carlo

macroeconomic modeling for monetary policy evaluation we describe some of the main features of the recent vintage macroeconomic models used for monetary policy evaluation we point to some of the key differences with respect to the earlier generation of macro models and highlight the insights for policy that these new frameworks have to offer our discussion emphasizes two key aspects of the new models the significant role of expectations of future policy actions in the monetary transmission mechanism and the importance for the central bank of tracking of the flexible price equilibrium values of the natural levels of output and the real interest rate we argue that both features have important implications for the conduct of monetary policy

imperfect information transmission from banks to investors macroeconomic implications abstract our goal is to elucidate the interaction of banks screening effort and strategic information production in loan backed asset markets using a general equilibrium framework asset quality is unobserved by investors but banks may purchase error prone ratings the premium paid on highly rated assets emerges as the main determinant of banks screening effort the fact that rating strategies reflect banks private information about asset quality helps keep this premium high conventional regulatory policies interfere with this decision margin thereby reducing signaling value of high ratings and exacerbating the credit misallocation problem we propose a tax subsidy scheme that induces efficiency

on the value of commitment with asymmetric information several recent papers have emphasized that long term relationships can be efficiently governed by short term contracts provided that there is no asymmetric information at the contracting dates this excludes not only adverse selection problems but also moral hazards problems in which hidden actions generate private information over the future in this paper we show in the context of a multiperiod principal agent relationship with adverse selection that renegotiable short term contracts can be as efficient as long term renegotiation proof contracts on the other hand spot contracting may fail to achieve long run efficiency not only because of intertemporal smoothing as with symmetric information but also because of ratchet effects and time inconsistency in the optimal structure of informational rents thus some limited commitment seems to be a necessary and sufficient condition to achieve long run efficiency

predicting loss severities for residential mortgage loans a three step selection approach abstract this paper develops a novel framework to model the loss given default lgd of residential mortgage loans which is the dominant consumer loan category for many commercial banks lgds in mortgage lending are subject to two selection processes default and cure where the collateral value exceeds the outstanding loan amount we propose a three step selection approach with a joint probability framework for default cure i e zero lgd and non zero loss severity information the proposed methodology demonstrates improved performance in out of time predictions compared to widely used ols regressions

sustainability performance for brazilian electricity power industry an assessment integrating social economic and environmental issues the increased pressure on companies to address sustainability issues has resulted in the development of several voluntary corporate sustainability integration approaches the array of existing approaches is large and overwhelming resulting in companies not understanding what corporate sustainability really means for their businesses considering environmental economic and social issues this paper aims at assessing the performance of the brazilian electricity power industry in terms of its sustainability performance an analysis of global reporting initiative gri indicators for the energy sector lead to an assessment of its sustainability performance by applying data envelopment analysis dea specified with a directional distance function ddf five scenarios were created i flexible weights ii triple bottom line iii social issues iv economic issues and v environmental issues with considering i flexibility weights almost all companies are efficient we also found a significant difference when we compared i with the other four scenarios ii iii iv and v taking into account the triple bottom line scenario ii the results indicate that companies were less efficient when compared with the flexible weights scenario i taking into account the last three scenarios iii iv and v only four companies were considered as providing top benchmarks in sustainability performance

cognition and incomplete contracts thinking about contingencies designing covenants and seeing through their implications is costly parties to a contract accordingly use heuristics and leave it incomplete the paper develops a model of limited cognition and examines its consequences for contractual design

securitization and lending competition we study the eects of securitization on interbank lending competition when banks see private signals of local applicants repayment chances if banks cannot securitize the outcome is e cient they lend to their most creditworthy local applicants with securitization banks lend also to remote applicants with strong observables in order to lessen the lemons problem they face in selling their securities this reliance on observables is ine cient raises the mean default risk and may lead to a deceptive rise in credit scores

bank skin in the game and loan contract design evidence from covenant lite loans in a model of dual agency problems where borrower lender and bank nonbank incentives may conflict we predict a hockey stick relation between bank skin in the game and covenant tightness as bank participation declines covenant tightness increases until reaching a low threshold at which point the relation sharply reverses and covenant protection is removed with a commensurate increase in spread we find support for the hockey stick relation with bank s stake in covenant lite loans averaging 8 0 median we also find that covenant lite loans are more likely when borrower moral hazard is less severe and when bank relationship rents are high

long term short term and renegotiation on the value of commitment in contracting spot contracting generally involves efficiency losses relative to long term contracting it is proved here that short term contracting and renegotiation allow to achieve long run efficiency when transfers are not limited objectives are conflicting and no relevant asymmetric information appears at recontracting dates this last assumption excludes adverse selection but not moral hazard when technologies and preferences are time separable copyright 1990 by the econometric society

loan sales and relationship banking firms raise money from banks and the bond market banks sell loans in a secondary market to recycle their funds or to trade on private information liquidity in the loan market depends on the relative likelihood of each motive for trade and affects firms optimal financial structure the endogenous degree of liquidity is not always socially optimal there is excessive trade in highly rated names and insufficient liquidity in riskier bonds we provide testable implications for prices and quantities in primary and secondary loan markets and bond markets further we posit that risk based capital requirements may be socially desirable the term collateralized loan obligations clos was coined in 1989 when corporate loans were first used as collateral in collateralized debt obligations cdos 1 since then the growth in loan sales has been enormous according to lucas et al 2006 1 1 trillion of cdos were outstanding as of 2005 and 50 of their collateral was comprised of loans in addition to pooled securities banks also trade first loss positions on single names through direct sales of individual loans in the united states loan sales have grown from 8 billion in 1991 to 154 8 billion by 2004 2 if a bank securitizes or sells a loan that it originated it is buying insurance on credit events over which it has either more control or more information than the buyer in the face of this informational friction why did the secondary market for corporate loans develop in the 1990s what effect has this had on relationship banking in this paper we characterize when a liquid secondary market for loans arises when a liquid secondary loan market is socially desirable and we provide testable predictions on the effect of the emergence of this market on prices and quantities in bond and primary loan markets our predictions are based on both changes in the parameters that lead to higher loan liquidity and changes in the contracts that are written between banks and firms given this higher liquidity

inflation targeting supported by managed exchange rate we compare on a welfare loss basis possible inflation targeting regimes supported by different exchange rate rules for model parametrization we estimate a forward looking monetary policy rule for trukey when variable inflation targets are taken into consideration as opposed to the fixed targets used in prior research that use data from developed countries forward looking taylor rules provide a reasonable description of central bank behaviour in turkey by applying a calibration based on estimated parameters we compare the loss functions under flexible inflation targeting and strict inflation targeting while taking into consideration the supporting regimes namely a flexible exchange rate and a managed floating exchange rate we find that the welfare loss function caused by four simultaneous shocks namely a foreign interest rate shock a monetary policy shock a foreign output shock and a domestic output shock is minimized under the flexible inflation targeting regime supported by a managed float

cultural proximity and loan outcomes we present evidence that shared codes religious beliefs ethnicity cultural proximity between lenders and borrowers improves the efficiency of credit allocation we identify in group preferential treatment using dyadic data on the religion and caste of bank officers and borrowers from a bank in india and a rotation policy that induces exogenous matching between officers and borrowers cultural proximity increases lending on both intensive and extensive margins and improves repayment performance even after the in group officer is replaced by an out group one further cultural proximity increases loan dispersion and reduces loan to collateral ratios our results imply that cultural proximity mitigates informational problems that adversely affect lending which in turn relaxes financial constraints and improves access to finance

equity bonds and bank debt capital structure and financial market equilibrium under asymmetric information this paper proposes a model of financial markets and corporate finance with asymmetric information and no taxes where equity issues bank debt and bond financing coexist in equilibrium the relationship banking aspect of financial intermediation is emphasized firms turn to banks as a source of investment mainly because banks are good at helping them through times of financial distress this financial flexibility is costly since banks face costs of capital themselves which they attempt to minimize through securitization to avoid this intermediation cost firms may turn to bond or equity financing but bonds imply an inefficient liquidation cost and equity an informational dilution cost we show that in equilib rium the riskier firms prefer bank loans the safer ones tap the bond markets and the ones in between prefer to issue both equity and bonds this segmentation is broadly consistent with stylized facts

incomplete contracts and signaling this article presents a principal agent model in which asymmetric information leads to contractual incompleteness i show that in the presence of transactions costs incompleteness may act as a signal of the principal s type two types of transactions costs are considered those incurred ex ante drafting costs and those incurred ex post enforcement or verification costs i prove that in the presence of either of these costs asymmetric information leads to more contractual incompleteness than full information does

what is wrong with taylor rules using judgment in monetary policy through targeting rules it is argued that inflation targeting is best understood as a commitment to a targeting rule rather than an instrument rule e ither ageneral targeting rule explicit objectives for monetary policy or a specific targeting rule a criterion for the forecasts of the target variables to be fulfilled essentially the equality of the marginal rates of transformation and substitution between the target variables targeting rules allow the use of judgment and extramodel information are more robust and easier to verify than optimal instrument rules and they can nevertheless bring the economy close to the socially optimal equilibrium

banks incentives and inconsistent risk models this paper investigates banks incentive to bias the risk estimates they report to regulators within loan syndicates we find that banks with less capital report lower risk estimates consistent with an effort to mitigate capital requirements the sensitivity to capital is robust to bank fixed effects and greater for large risky and opaque credits also low capital banks risk estimates have less explanatory power than those of high capital banks with regard to loan prices indicating that their estimates incorporate less information our results suggest banks underreport risk in response to capital constraints and highlight the perils of regulation premised on self reporting received september 21 2016 editorial decision september 18 2017 by editor philip strahan authors have furnished an internet appendix which is available on the oxford university press web site next to the link to the final published paper online

inflation targeting flexible exchange rates and inflation convergence using a disaggregated level consumer price index cpi data this article compares convergence properties of regional inflation rates in a small open economy turkey between pre inflation targeting and inflation targeting periods where the latter also corresponds to a flexible exchange rate regime it is found that during the inflation targeting period turkish regional inflation rates have converged to each other in terms of cpi groups with relatively nontradable components while they have diverged from each other in terms of cpi groups with relatively tradable components since a common and sound monetary policy among the regions of a country is supposed to have a convergence effect on regional inflation rates according to the conventional wisdom the results for cpi groups with relatively tradable components require further attention and have significant policy implications especially for inflation targeting countries using flexible exchange rate regimes

a model of add on pricing this paper examines competitive price discrimination with horizontal and vertical taste differences consumers with higher valuations for quality are assumed to have stronger brand preferences two models are considered a standard competitive price discrimination model in which consumers observe all prices and an add on pricing game in which add on prices are naturally unobserved and firms may advertise a base good at a low price in hopes of selling add ons at high unadvertised prices in the standard game price discrimination is self reinforcing the model sometimes has both equilibria in which the firms practice price discrimination and equilibria in which they do not the analysis of the add on pricing game focuses on the chicago school argument that profits earned on add ons will be competed away via lower prices for advertised goods a conclusion is that add on practices can raise equilibrium profits by creating an adverse selection problem that makes price cutting unappealing although profitable when jointly adopted using add on pricing is not individually rational in a simple extension with endogenous advertising practices and costless advertising several models that could account for add on pricing are discussed

mortgage modification and strategic behavior evidence from a legal settlement with countrywide abstract we investigate whether homeowners respond strategically to news of mortgage modification programs we exploit plausibly exogenous variation in modification policy induced by settlement of us state government lawsuits against countrywide financial corporation which agreed to offer modifications to seriously delinquent borrowers using a difference in differences framework we find that countrywide s monthly delinquency rate increased more than 0 54 percentage points a 10 percent relative increase immediately after the settlement s announcement the estimated increase in default rates is largest among borrowers least likely to default otherwise these results suggest that strategic behavior should be an important consideration in designing mortgage modification programs jel d14 g21 k22 r31

debt relief and slow recovery a decade after lehman abstract we follow a representative panel of millions of consumers in the united states from 2007 to 2017 and document new facts on the long term effects of the great recession there were about six million foreclosures over this period only a quarter of foreclosed households regained homeownership taking an average four years to do so this persistent loss of homeownership accounts for most of the decline in the u s homeownership rate despite massive stimulus and debt relief policies house prices consumption and unemployment remained below precrisis levels in about half of the zip codes in the united states regions that recovered to precrisis levels took on average four to five years regional variation in the extent and speed of recovery is strongly and persistently associated with frictions affecting the pass through of lower interest rates and debt relief to households

effects of credit and debit cards on the currency demand we analyze the effects of credit and debit cards on the currency in circulation by using gmm estimation instead of using the data obtained by surveys we use monthly data obtained by an interbank institution that keeps the statistics of all credit and debit cards usage of a small open economy turkey for the period over 2002m1 2006m10 as expected from the theory we find that an increase in the usage of credit and debit cards leads to a decrease in the currency demand moreover the usage of the debit cards has a bigger effect on the money demand compared to the usage of the credit cards we also find that the effect of credit cards is mostly through purchases and the effect of debit cards is mostly through withdrawals

statistical default models and incentives the likelihood that a bank loan will default is of interest to both regulators and investors under the basel ii regulatory guidelines a bank must hold capital in proportion to the riskiness of its assets the probability of default is a pri mary determinant of the riskiness of a loan investors in turn price a loan in the secondary market based on its expected cash flow which again depends on the default probability how should market participants assess the default probability on a pool of bank loans it is natural to consider historical data on loan condi tions and default rates and to estimate a statisti cal model that can be used to predict defaults going forward such statistical models have been widely used across the financial markets to enhance market liquidity and impose capital requirements on financial institutions the accuracy of predictions from statistical models was especially poor in the subprime mortgage market in the period from august 2007 onwards 1 we argue that one cause for this failure was that these models relied entirely on hard information variables and ignored changes in the incentives of lenders to collect soft infor

arm s length relationships we show that lowering the cost of acquisition of information that a principal obtains about the performance of an agent may make it more difficult for the principal to commit to threats hence it will weaken incentives and can therefore be counterproductive this phenomenon is explored in a framework where improving the quality of information makes a commitment not to renegotiate less credible applications to the theory of the firm are briefly explored

corporate sustainability ratings an investigation into how corporations use the dow jones sustainability index abstract the purpose of this paper is to explore the use of the dow jones sustainability index djsi with an emphasis on canadian corporations the paper provides insight into the use of the djsi in several areas including the use of its logo the steps taken by corporations to achieve initial acceptance to the index and the steps corporations take to maintain their inclusion in the djsi a content analysis of publicly available information from 24 canadian corporations listed in the djsi north america djsina showed that less than half of those sampled used the djsi logo in their sustainability reports or on their websites the majority of the published references to the djsi were in highlighting corporate achievements or in providing background information on the index a survey of 10 experts from the canadian corporations listed in the djsina revealed a wide range of strategies for gaining and maintaining inclusion in the index particularly involving a large number of internal stakeholders in responding to data requests and working with third parties several suggestions for improving the djsi were also provided including streamlining the questionnaire improving coordination among sustainability ratings agencies and enhancing transparency

nash equilibrium and welfare optimality if is a set of social alternatives a social choice rule scr assigns a subset of a to each potential profile of individuals preferences over a where the subset is interpreted as the set of welfare optima a game form or mechanism implements the social choice rule if for any potential profile of preferences 1 any welfare optimum can arise as a nash equilibrium of the game form implying in particular that a nash equilibrium exists and 2 all nash equilibria are welfare optimal the main result of this paper establishes that any scr that satisfies two properties monotonicity and no veto power can be implemented by a game form if there are three or more individuals the proof is constructive