the collateral channel how real estate shocks affect corporate investment abstract what is the impact of real estate prices on corporate investment in the presence of financing frictions firms use pledgeable assets as collateral to finance new projects through this collateral channel shocks to the value of real estate can have a large impact on aggregate investment to compute the sensitivity of investment to collateral value we use local variations in real estate prices as shocks to the collateral value of firms that own real estate over the 1993 2007 period the representative us corporation invests 0 06 out of each 1 of collateral jel d22 g31 r30

the evolving landscape of banking the structure of the financial services industry is in flux liberalization deregulation and advances in information technology have changed the financial landscape dramatically interbank competition has heated up and banks face increasing competition from nonbanking financial institutions and the financial markets the predictability of the industry with low levels of financial innovation little innovation in distribution channels and well defined and rigid institutional structures is gone product innovations new distribution channels and emerging new competitors are in abundance moreover the subprime crisis that has hit the financial sector in 2007 2008 appears to have a major impact on the structure of the industry this article emphasizes the importance of understanding the economics of banking for assessing the changes in the industry in particular we point at relationship banking as a prime source of the banks comparative advantage the proliferation of transaction oriented banking trading and financial market activities does however seriously challenge relationship banking in order to focus on these issues in a rigorous way we will evaluate the key insights from the relationship banking literature including the potential complementarities and conflicts of interest between intermediated relationship banking activities and financial market underwriting securitization etc activities we also address the issue of the optimal conglomeration of bank activities including the empirical evidence on scope and scale economies we analyze the strategic positioning of banks in the currently highly uncertain competitive arena and link this to the theory of the firm and particularly firm boundaries and learning

financial contracting theory meets the real world an empirical analysis of venture capital contracts we compare the characteristics of real world financial contracts to their counterparts in financial contracting theory we do so by studying the actual contracts between venture capitalists vcs and entrepreneurs the distinguishing characteristic of vc financings is that they allow vcs to separately allocate cash flow rights board rights voting rights liquidation rights and other control rights we describe and measure these rights we then interpret our results in relation to existing financial contracting theories we also describe the interrelation and the evolution across financing rounds of the different rights query 1 query 2

contractual resolutions of financial distress in a financial contracting model we study the optimal debt structure to resolve financial distress we show that a debt structure where two distinct debt classes co exist one class fully concentrated and with control rights upon default the other dispersed and without control rights removes the controlling creditor s liquidation bias when investor protection is strong these results rationalize the use and the performance of floating charge financing debt financing where the controlling creditor takes the entire business as collateral in countries with strong investor protection more broadly our theory predicts that the efficiency of contractual resolutions of financial distress should increase with investor protection

more on measuring budget related rent seeking a comment following the work of tuuock 1967 kreuger 1974 and posner 1975 the theory of rent seeking has become a well established part of economics in a recent paper we katz and rosenberg 1989 offered a measure of the rentseeking associated with government spending basing himself on our work scully 1991 presents further results relating to such rent seeking and makes two claims first that our measure is a conceptually incorrect evaluation of the rent seeking associated with government expenditure and second that the measure of rent seeking suggested by him and into which our measure is an input is a meaningful and appropriate estimate of such rent seeking while reading scully s paper we realized that he touches upon a matter whose importance goes far beyond his offered measure this issue concerns the extent of rent seeking that takes place in given periods of time is there rentseeking for everything in every period or does the rent seeking occurring at any point in time mainly involve struggles over m i n o r reallocations of property rights the answer to this question has crucial implications for the amount of waste which occurs through rent seeking activities if rent seeking is always for everything rent seeking waste is likely to suck up a large proport ion of gnp in each period in this view rent seeking constitutes something like an economic black hole which threatens all economic well being if on the other hand rent seeking involves minor adjustments then while it reduces economic welfare rent seeking does not devour the benefits of a major proport ion of economic activity

rent seeking in u s government budgets 1900 88 a measure of waste from the competitive rent seeking activity of special interest groups in federal state and local budgets was calculated over the period 1900 88 this period in u s fiscal history is characterized by constitutional changes that have made for more transparency in governmental fiscal activities and for greater diffusion of taxes the xvi amendment to the constitution created the progressive individual income tax the corporate income tax was judged to be an excise tax in 1909 and passed the test of constitutionality high marginal tax rates are a justification for a high average level of taxation the full employment act of 1946 insitutionalized government deficits as a means of meeting a political objective as a result opportunities for rent seeking through budgetary reallocations rose in the united states in the first two decades of the 20th century waste at all levels of government represented about 10 percent of incremental national output today waste is three times that amount the transparency and diffusion of taxes are highest at the federal level and least at the local level rent seeking through budgetary reallocation has followed the public purse one explanation for the observed centralization of government in the 20th century may be that opportunities to concentrate benefits and diffuse taxes are highest at the federal level finally the withdrawal of resources from the productive economy to pursue rent seeking in government budgets lowers the rate of real economic growth i find that rent seeking through budget reallocations has had a significant and large negative effect on the growth rate

the perils of prescription economics and the macroeconomic policy adviser abstract the professional economist has had a checkered career since the war his star rose high for roughly the first 20 years of the postwar era when an activist government role in economic affairs was generally welcomed and the economist s advice readily sought in the ensuing 20 years a period characterized by severe economic dislocation and turbulence the economist s fortunes fell precipitously as he was seen unable to provide ready answers to complex problems and his forecasts were off the mark the economist can and does play a useful role but his effectiveness is subject to many limitations and restraints especially in the areas of prediction and prescription and these must be recognized by both his employer and himself

delegation and incentives this article analyzes the relation between authority and incentives it extends the standard principal agent model by a project selection stage in which the principal can either delegate the choice of project to the agent or keep the authority the agent s subsequent choice of effort depends both on monetary incentives and the selected project we find that the consideration of effort incentives makes the principal less likely to delegate the authority over projects to the agent in fact if the agent is protected by limited liability delegation is never optimal

investment options and bargaining power the eurasian supply chain for natural gas we use cooperative game theory to analyze how the architecture of the pipeline network determines the power structure in the supply chain for russian gas if the assessment is narrowly focused on the abilities to obstruct flows in the existing system the main transit countries belarus and ukraine appear to be strong if investment options are accounted for however russia achieves clear dominance we show that options to bypass one of the transit countries are of little strategic importance compared to russia s direct access to its customers through the baltic sea comparing the results of our calibrated model with empirical evidence obtained from transit and import agreements we find that the shapley value explains the power of major transit countries better than the core and the nucleolus

rent seeking for budgetary allocation preliminary results for 20 countries in this paper we present quantitative measures of the proneness of different countries to respond to pressure groups in determining the composition of their spending these in turn help us to derive simple measures of the rent seeking done in relation to the government s spending pie

asset redeployability liquidation value and endogenous capital structure heterogeneity firms with lower leverage are not only less likely to experience financial distress but are also better positioned to acquire assets from other distressed firms with endogenous asset sales and values each firm s debt choice then depends on the choices of its industry peers with indivisible assets otherwise identical firms may adopt different debt policies with some choosing highly levered operations to take advantage of ongoing debt benefits and others choosing more conservative policies to wait for acquisition opportunities our key empirical implication is that the acquisition channel can induce firms to reduce debt when assets become more redeployable

the institutional environment and the number of bank relationships an empirical analysis of european smes this article examines the association between creditor protection as measured by the nature of legal rules and the quality of law enforcement and multiple bank relationships using a unique survey sample of smes from 19 european countries we find that the likelihood of multiple banking is the highest for smes in french civil law countries next highest for german civil law countries and the lowest in scandinavian civil law and english common law countries we also find that smes in countries with low legal efficiency are more likely to establish multiple bank relationships these results seems to confirm the underlying idea in the law and finance literature that relevant loan risk for banks also arises from low quality of laws and institutions and not just from firm specific characteristics banks in countries where protection of creditor rights is poor may resort to multiple banking to share this additional risk policy makers can use our findings to justify the necessity of improving their institutions by reducing legal formalisms and thereby lowering the enforcement costs in the courts this would lead to better loan contracting and enhance the flow of debt capital which is required for a healthy and dynamic economy

when two wrongs make a right second best point nonpoint trading ratios most research on point nonpoint trading focuses on the choice of trading ratio the rate point source controls trade for nonpoint controls although the first best ratio is jointly determined with the optimal number of permits in practice program managers often do not have control over the number of permits only the trading ratio the trading ratio in this case can only be second best we derive the second best trading ratio and using a numerical example of trading in the susquehanna river basin we find the values are in line with current ratios but for different reasons than those that are normally provided

strategic ownership structure and the cost of debt we theoretically and empirically address the endogeneity of corporate ownership structure and the cost of debt with a novel emphasis on the role of control concentration in postdefault firm restructuring control concentration raises agency costs of debt and dominant shareholders trade off private benefits of control against higher borrowing costs in choosing their ownership stakes based on our theoretical predictions and using an international sample of syndicated loans and unique dynamic ownership structure data we present new evidence on the firm and macro level determinants of corporate control concentration and the cost of debt jel g21 g32

a theory of corporate capital structure and investment this article uses a general equilibrium framework to explore the origins and limitations of financial intermediaries in the model investors have a generic lending technology that they can improve at a cost those who upgrade become intermediaries to exploit their advantage however conflicts with depositors will limit the banks market presence and they will only lend to moderately endowed firms while bondholders will finance cash rich corporations the article also analyzes the extent to which investors adopt the superior lending technique the nature of bank competition and how corporate and bank conditions affect interest rates and investment copyright 2004 oxford university press

specialization productivity and financing constraints we analyze optimal financial contracts when the specificity of investments is endogenous specialization decreases the liquidation value of assets but improves the asset s long term productivity while the former is known to make financing more difficult we show that the latter can ease financing constraints and increase financing capacity by improving an entrepreneur s incentive to repay the overall impact of specialization on the terms of financing depends on which effect is more important specialization decisions interact with the nature of investments their timing the need for outside financing and an entrepreneur s ability to commit to a level of specialization the author 2013 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

is relationship lending special evidence from credit file data in germany the german financial market is often characterized as a bank based system with strong bank customer relationships the corresponding notion of a housebank is closely related to the theoretical idea of relationship lending it is the objective of this paper to provide a direct comparison between housebanks and normal banks as to their credit policy therefore we analyze a new data set representing a random sample of borrowers drawn from the credit portfolios of five leading german banks over a period of five years we use credit file data rather than industry survey data and thus focus the analysis on information that is directly related to actual credit decisions in particular we use bank internal borrower rating data to evaluate borrower quality and the bank s own assessment of its housebank status to control for information intensive relationships the major results of our study support the view that housebanks are able to establish a distinct behavioral pattern consistent with the idea of long term commitment we find that housebanks do provide liquidity insurance in situations of unexpected deterioration of borrower ratings with respect to loan pricing we find no evidence for intra or intertemporal price differentiation related to housebanking

repossession and the democratization of credit we exploit a 2004 credit reform in brazil that simplified the sale of repossessed cars used as collateral for auto loans we show that the reform expanded credit to riskier self employed borrowers who purchased newer more expensive cars the legal change has led to larger loans with lower spreads and longer maturities although the credit reform improved riskier borrowers access to credit it also led to increased incidences of delinquency and default our results shed light on the consequences of a credit reform and highlight the crucial role that collateral and repossession play in the liberalization and democratization of credit

corporate bankruptcy reorganizations estimates from a bargaining model this article uses a novel approach to measure the unobserved liquidation value of a firm that relies on the information contained in the allocations that are agreed upon in chapter 11 negotiations i estimate a game theoretic model that captures the influence of liquidation value on the equilibrium allocations using a newly collected data set i find that the liquidation values are higher when the industry conditions are more favorable and the real interest rates are higher i use the estimated model to conduct a counterfactual experiment to quantitatively assess the impact of a mandatory liquidation on the equilibrium allocations

liquidation values and the credibility of financial contract renegotiation evidence from u s airlines how do liquidation values affect financial contract renegotiation while the incomplete contracting theory of financial contracting predicts that liquidation values determine the allocation of bargaining power between creditors and debtors there is little empirical evidence on financial contract renegotiations and the role asset values play in such bargaining this paper attempts to fill this gap we develop an incomplete contracting model of financial contract renegotiation and estimate it using data on the airline industry in the united states we find that airlines successfully renegotiate their lease obligations downward when their financial position is sufficiently poor and when the liquidation value of their fieet is low our results show that strategic renegotiation is common in the airline industry moreover the results emphasize the importance of the incomplete contracting perspective to real world financial contract renegotiation

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

the structure of multiple credit relationships evidence from u s firms when firms borrow from multiple concentrated creditors such as banks they appear to differentiate their allocation of borrowing in this paper we put forward hypotheses for this borrowing pattern based on incomplete contract theories and test them using a sample of small u s firms we find that firms with more valuable and more homogeneous assets differentiate borrowing more sharply across concentrated creditors moreover borrowing differentiation is inversely related to restructuring costs and positively related to firms informational transparency the results suggest that the structure of credit relationships is used to discipline creditors and entrepreneurs especially during corporate reorganizations

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

debt renegotiation and debt overhang evidence from lender mergers this paper studies whether debt renegotiation mitigates debt overhang and improves investment efficiency using mergers between lenders participated in the same syndicated loans as natural experiments that exogenously reduce the number of lenders and thus make renegotiation easier i find that firms affected by the mergers experience more loan renegotiations and increase capital expenditure investment i also find that the effect is stronger for firms with higher q suggesting improved investment efficiency further evidence suggests that the effect concentrates on loans without performance pricing provisions and unsecured loans providing further support that lender mergers improves investment efficiency for firms suffering from debt overhang ex ante

distress risk premia in expected stock and bond returns abstract prior studies find that shareholders strategic actions over debtholders are significant for stock prices but not for bond prices i find that for firms with private and public debt strategic default has no significant effect on distress risk premia in expected stock or bond returns suggesting that the dispersion of bondholders greatly weakens the shareholder advantage effect the shareholder advantage effect on stock prices is only significant for firms with only private debt and to some degree affected by the dispersion of stockholders and complexity in capital structure overall renegotiation friction helps explain the cross sectional implications of strategic default for stock and bond prices

creditor concentration an empirical investigation most of the literature on multiple banking assumes equal financing shares however unequal asymmetric or concentrated bank borrowing is widespread and creditor concentration is only weakly correlated with the number of bank relationships this paper therefore investigates the determinants of creditor concentration for german firms using a comprehensive firm bank level dataset for the time period between 1993 and 2003 we document that corporate borrowing from banks is very often concentrated even for the largest firms in our sample leveraged firms and firms with more redeployable assets concentrate their borrowing from banks as are firms dealing with a relationship lender that is profitable that has lower monitoring costs or that operates in a concentrated regional lending market

benefits of relationship banking evidence from consumer credit markets abstract using a unique panel dataset that contains comprehensive information about the relationships between a large bank and its credit card customers we show that relationship accounts exhibit lower probabilities of default and attrition and have higher utilization rates than non relationship accounts dynamic information about changes in the behavior of a customer s other accounts at the same bank helps predict the behavior of the credit card account over time these results imply that relationship banking offers significant potential benefits to banks information the lender has at its disposal can be used to mitigate credit risk on the credit card account

understanding the soft budget constraint we propose a clarification of the notion of a soft budget constraint a concept widely used in the analysis of socialist transitional and market economies our interpretation is broad enough to embrace most existing approaches to soft budget constraint phenomena and provides a classification of their causes and consequences in light of this interpretation we then review the theoretical literature on the subject and compare it with those on other dynamic commitment problems in economics

product market competition and the financing of new ventures this paper examines the interaction between venture risk product market competition and the entrepreneur s choice between bank financing and venture capital vc financing under bank financing a debt type contract emerges as optimal which allows the entrepreneur to retain full control of the venture and thus yields strong effort incentives as long as the entrepreneur can service the debt repayment however this leads to liquidation in the case of default making the venture s success quite sensitive to exogenous even temporary shocks that may hinder debt repayment under vc financing an equity type contract emerges as optimal although it is not sensitive to exogenous shocks this contract requires the entrepreneur to share a fraction of the rents with the financier thus yielding lower effort incentives for the entrepreneur there exists a threshold level of venture risk such that bank financing is optimal if and only if venture risk is below that threshold product market competition increases the value of stronger entrepreneurial incentives and thus increases the maximum level of risk the entrepreneur is willing to take before switching from bank financing to vc financing this is a robust result that is shown to hold in various models of competition including the hotelling salop dixit stiglitz and cournot to bertrand switch this paper was accepted by lee fleming entrepreneurship and innovation

the evolution of debt policies new evidence from business startups abstract we investigate the evolution of entrepreneurial firms debt policies over a period of 15 years after startup considering leverage debt specialization debt maturity and debt granularity our analysis is based on a unique sample covering all non financial belgian firms founded between 1996 and 1998 we find that the debt policy of entrepreneurial firms is remarkably stable over time the debt policy in the initial year of operation is a very important determinant of future debt policies even after controlling for traditional contemporaneous determinants the founder ceo has an important impact on the stability of debt policies the influence of initial debt policies on future debt policies is significantly reduced when the founder ceo is replaced or when s he dies combined our findings support imprinting theory

institutional technology and economic growth an endogenous model of constitutional changes and economic growth links the temporal decline in private market returns when technology is constant with the returns to rule changes realized in a political market there is a steady state constitutional setting in which all rule changes have been incorporated that is analytically equivalent to the neoclassical steady state as in the neoclassical model private sector technological progress postpones the steady state to the extent the original constitutional setting promotes innovation the evolutionary process toward the steady state is delayed the model yields a theory of revolution based on forces leading to the adoption of inefficient changes in the constitutional setting

bank resolution a framework for the assessment of regulatory intervention more than ever the current crisis has highlighted the cost of banking crises in budgetary and economic growth terms whether or not to restructure a bank is a key determinant of who bears the costs the present article surveys the main issues concerning banks restructuring by considering the bargaining game that is played between regulators and shareholders when a bank is in distress this revolves around the framework of negotiation that was established by the regulator the fall back position which is determined by bankruptcy legislation and the objective function of the regulator in this context we argue that it is possible to improve upon existing restructuring mechanisms by making banks bail outs less costly to taxpayers and improving the ex ante incentives of banks managers and shareholders the authors 2012 published by oxford university press

corporate finance and the monetary transmission mechanism we analyze the transmission effects of monetary policy in a general equilibrium model of the financial sector with bank lending and securities markets bank lending is constrained by capital adequacy requirements and asymmetric information adds a cost to outside bank equity capital in our model monetary policy does not affect bank lending through changes in bank liquidity rather it operates through changes in the spread of bank loans over corporate bonds which induce changes in the aggregate composition of financing by firms and in banks equity capital base the model produces multiple equilibria one of which displays all the features of a credit crunch this article is concerned with the monetary transmission mechanism through the financial sector in particular the banking sector and securities markets specifically it analyzes the effects of open market operations on bank lending and securities issues in a real economy by building on recent advances in the microeconomics of banking it provides some underpinnings for the credit view of monetary policy which in its simplest form relies on an exogenously assumed limited substitutability between bank loans and bonds the macroeconomics literature distinguishes between the money view and credit view of monetary policy transmission bernanke and blinder 1988 1992 the money view takes bonds and loans to be perfect substitutes and only allows for the effects of monetary policy on aggregate investment consumption and savings through changes in interest rates the credit view allows for an additional effect on investment and economic activity operating through bank credit supply

cyclicality of credit supply firm level evidence abstract we quantify fluctuations in bank loan supply in the time series by studying firms substitution between loans and bonds using firm level data any firm that raises new debt must have a positive demand for external funds conditional on the issuance of new debt we interpret firms switching from loans to bonds as a contraction in bank credit supply we find strong evidence of this substitution at times that are characterized by tight lending standards depressed aggregate lending poor bank performance and tight monetary policy we show that this substitution behavior has strong predictive power for bank borrowing and investments by small firms

opportunistic underinvestment in debt renegotiation and capital structure abstract this paper models debt renegotiation as a bargaining game between debtholders and shareholder oriented management in which management credibly threatens to run down firm assets to force concessions from the creditors creditors anticipate this opportunistic behavior by management creating an upper bound on debt capacity that is less than the value of the firm if an advantage to debt is introduced such as favorable tax treatment an interior optimal capital structure obtains even in the absence of realized bankruptcy costs our model also explains variations in debt equity ratios and the use of certain puzzling debt covenants

of religion and redemption evidence from default on islamic loans we compare default rates on conventional and islamic loans using a comprehensive monthly dataset from pakistan that follows more than 150 000 loans over the period 2006 04 to 2008 12 we find robust evidence that the default rate on islamic loans is less than half the default rate on conventional loans islamic loans are less likely to default during ramadan and in big cities if the share of votes to religious political parties increases suggesting that religion either through individual piousness or network effects may play a role in determining loan default

financial distress and the business cycle in this paper we argue that firms financial distress should play a greater role in the macroeconomic analysis of the business cycle we provide a non technical account of a general equilibrium model that exhibits financially driven equilibrium cycles we show that the empirical evidence is widely supportive of the key hypothesis and implications of our approach we use the model in order to evaluate the effects of several policy measures it turns out that deepening the market for second hand capital goods subsidizing the interest payments of companies which start up when financial conditions are tight and bailing out some companies in default can indeed stabilize the economy by way of generalization we may say that the policy reaction to a financially driven bust should be accommodating

optimal monetary policy with countercyclical credit spreads we study optimal monetary policy in a new keynesian dynamic stochastic general equilibrium dsge model with a credit channel and relationship lending in banking we show that borrowers bank specific deep habits give rise to countercyclical credit spreads which in turn make optimal monetary policy depart substantially from price stability under both discretion and commitment our analysis shows that the welfare costs of setting monetary policy under discretion with respect to the optimal ramsey plan and of using simpler suboptimal policy rules are strictly increasing in the magnitude of deep habits in credit markets and market power in banking

the empirical measurement of rent seeking costs this survey focuses on the efforts carried out mainly by public choice scholars to measure the social cost of rent seeking the concept introduced by gordon tullock in 1967 and coined by anne krueger in 1974 is well known and accepted by the profession but its empirical measurement has fallen behind with respect to its theoretical formulation an often criticized lack in the literature although there are good general surveys none has specifically focused on reviewing the empirical efforts made to measure the phenomenon the purpose of this paper is to provide such a survey it could be said that the rent seeking concept has been fully integrated into economic jargon it is commonly used when some agent seeks to obtain an artificial transfer usually from government and covers all the actions efforts or expenses that the agent has to carry out to obtain the prize the key issue however is the possible social waste that arises in these situations the empirical efforts to measure such waste constitute the main purpose of this survey the concept of rent seeking was introduced by tullock 1967 although the term was first coined by krueger 1974 in a paper not related to the former in a recent paper tullock himself wrote of the history of the concept and the intellectual context within which it arose tullock 2003 starting with the pioneering work by harberger 1954 several studies were conducted during the 1950s in which the calculation of the social cost of monopolies and tariffs always gave the result of very modest figures the first response to these results was made by leibenstein 1966 and his x efficiency which refers to a hypothetical loss in efficiency due to the absence of competition shortly after leibenstein s paper appeared tullock argued that the deadweight costs of monopoly and tariffs understate the true social cost because the expenditures made to capture related rents have to be included so rectangles as well as harberger s triangles have to be included in the calculations let us see this argument once more figure 1 depicts the iconic tullock graphic analysis of rent seeking it represents the demand schedule d for a monopolized good where pm is the monopoly

monitoring and structure of debt contracts this paper presents a theory of optimal debt structure when the moral hazard problem is severe the main idea is that the optimal debt contract delegates monitoring to a single senior lender and that seniority allows the monitoring senior lender to appropriate the full return from his monitoring activities the theory explains i why debt contracts are prioritized ii why short term debt is senior to long term debt and iii why financial intermediaries usually hold short term senior debt whereas long term junior debt is widely held another implication of the theory is that covenant and maturity structures will be set to conform to the seniority structure

credit and efficiency in centralized and decentralized economies we study a credit model where because of adverse selection unprofitable projects may nevertheless be financed indeed they may continue to be financed even when shown to be low quality if sunk costs have already been incurred we show that credit decentralization offers a way for creditors to commit not to refinance such projects thereby discouraging entrepreneurs from undertaking them initially thus decentralization provides financial discipline nevertheless we argue that it puts too high a premium on short term returns the model seems pertinent to two issues soft budget constraint problems in centralized economies and differences between anglo saxon and german japanese financing practices

intangible capital relative asset shortages and bubbles abstract purely technological factors can be a fundamental force behind the emergence of asset price bubbles in developed economies we analyze an economy in which the production technology utilizes both physical and intangible capital where the latter cannot be used as collateral for borrowing technological change in the form of increased importance of intangible capital in production sharpens the borrowing constraints of entrepreneurs leading to a scarcity of high yield assets relative to low yield ones this can create the conditions for asset bubbles additionally due to the financial frictions standard dynamic efficiency tests are not valid and bubbles are not pareto improving

optimal debt structure and the number of creditors within an optimal contracting framework we analyze the optimal number of creditors a company borrows from we also analyze the optimal allocation of security interests among creditors and intercreditor voting rules that govern renegotiation of debt contracts the key to our analysis is the idea that these aspects of the debt structure affect the outcome of debt renegotiation following a default debt structures that lead to inefficient renegotiation are beneficial in that they deter default but they are also costly if default is beyond a manager s control the optimal debt structure balances these effects we characterize how the optimal debt structure depends on firm characteristics such as its technology its credit rating and the market for its assets

theoretical foundations for sticky wages abstract the paper compares three different types of theoretical explanation of sticky wages they are implicit contracts efficiency wage models and insider outsider models it then reconsiders keynes rationale for sticky wages which focuses on relative wage issues finally the paper considers possible directions for future research

contractual flexibility rent seeking and renegotiation design an empirical analysis of information technology outsourcing contracts this paper examines renegotiation design in contracts for outsourced information technology it services whereas prior literature in information systems has highlighted the likelihood of ex post rent seeking engendered by renegotiation we build upon literature on incomplete contracts to posit that renegotiation can be pareto improving by incorporating contingencies revealed ex post research on contract renegotiation has been hampered by two sets of challenges the lack of appropriate data and empirical challenges in identification we circumvent this problem both by appropriate data collection and by employing an identification strategy to address alternate causal explanations we propose a measure pareto improving amendments to assess renegotiation outcomes that enhance the value from outsourcing by hazard equilibration and by incorporating learning using a unique sample of 141 it outsourcing contracts we examine the role of decision rights delineated ex ante in enabling pareto improving amendments and in resolving the trade off between adaptation and rent seeking we find that flexibility provisions termination for convenience rights and contractual rights whereby vendors are granted rights to reuse know how are associated with pareto improving amendments the results are robust to potential endogeneity of contractual provisions when parties have feasible foresight and to the possibility of adverse selection in the sample we also examine alternate explanations from the literature on contractual breach implications for practitioners and researchers are discussed this paper was accepted by sandra slaughter information systems

the variety of maturities offered by firms and institutional investment in corporate bonds we study how a firm s decision to offer bonds of various maturities affects the portfolio allocations of institutional investors we argue that because of lower information collection costs institutional investors tilt their portfolios towards firms that offer bonds of various maturities we show that this translates into lower bond yields both in the primary and in the secondary bond markets

on the optimality of resetting executive stock options the practice of resetting strike prices on underwater executive stock options has drawn criticism for weakening managerial incentives our model shows that although the anticipation of resetting can negatively affect initial incentives resetting can still be an important value enhancing aspect of compensation contracts even from an ex ante standpoint in fact we find that some resetting is almost always optimal the relative advantages of resetting diminish with greater ability of managers to influence the resetting process greater relative importance of external factors on stock performance and lower costs of replacing incumbent managers

ex ante efficiency of bankruptcy procedures abstract this paper suggests a framework to analyze the efficiency properties of bankruptcy procedures distinguishing between ex ante and ex post efficiency ex post efficiency consists in maximizing the ex post value of the insolvent firm whereas ex ante efficiency consists in maximizing the proceeds to creditors from the reorganization of the firm and providing incentives for the creditors to monitor the firm we show that the definition of creditors ownership rights over the company and the protection of the creditors seniority are crucial to asses the ex ante efficiency of a bankruptcy procedure

financial contracting and leverage induced over and under investment incentives this paper investigates the effects of seniority rules and restrictive dividend convenants on the over and under investment incentives associated with risky debt we show that increasing seniority of new debt decreases the incidence of under investment but increases over investment and vice versa under symmetric information the optimal seniority rule is to give new debtholders first claim on a new project without recourse to existing assets i e project financing under asymmetric information the optimal debt contract requires equating the expected return to new debtholders in the default state to the new project s cash flow in the same rate if this is not possible the optimal seniority rule calls for strict subordination of new debt if the expected cash flow in default is small and full seniority if it is large with regard to dividend convenants we show that their effect depends on whether or not dividend payments are conditioned on future investments when they are unconditioned allowing more dividends increases the under investment incentive in contrast conditional dividends decrease the underinvestment incentive and increase the over investment incentive

should courts enforce credit contracts strictly the intimate linkages between law and nance are currently the centre of wide rangingempirical investigations this article presents a simple banking model with informationasymmetries concerning borrowers entrepreneurial talent it is shown that improvements inthe enforcement of contract by courts reduce agency problems but can also reduce the bank sincentive to screen borrowers adequately thus worsening credit allocation a stricterenforcement of credit contracts therefore may be socially harmful even if costlessly achieved improvements in accounting standards however always make bank screening of borrowers lesscostly and improve credit allocation and social welfare

are good or bad borrowers discouraged from applying for loans evidence from us small business credit markets this paper takes the concept of a discouraged borrower originally formulated by kon and storey kon y storey d j 2003 a theory of discouraged borrowers small business economics 21 37 49 and examines whether discouragement is an efficient self rationing mechanism using us data it finds riskier borrowers have higher probabilities of discouragement which increase with longer financial relationships suggesting discouragement is an efficient self rationing mechanism it also finds low risk borrowers are less likely to be discouraged in concentrated markets than in competitive markets and that in concentrated markets high risk borrowers are more likely to be discouraged the longer their financial relationships we conclude discouragement is more efficient in concentrated than in competitive markets

a theory of competition among pressure groups for political influence this paper presents a theory of competition among pressure groups for political influence political equilibrium depends on the efficiency of each group in producing pressure the effect of additional pressure on their influence the number of persons in different groups and the deadweight cost of taxes and subsidies an increase in deadweight costs discourages pressure by subsidized groups and encourages pressure by taxpayers this analysis unifies the view that governments correct market failures with the view that they favor the politically powerful both are produced by the competition for political favors

local governments monopoly power and local tax reform theory and evidence from the u k this paper hypothesises the existence of several sources of monopoly power for local governments when the system of local taxation is reformed by central government in particular we argue that information asymmetries between tax payers and central and local government at the time of reform provide opportunities for local politicians to set tax levels which differ from those expected in a full information setting we predict that compared to pre reform tax levels local tax levels post reform will differ according to four local government characteristics i the size of the seat majority of the ruling local party ii whether the party controlling local government is the same as or is different from the ruling party of central government iii whether the local government structure has one or two tiers and whether the same party controls both tiers and iv the degree of indebtedness of the local authority testing the model on the u k local tax reform of 1990 we find strong evidence consistent with the hypothesis that inter authority differences in local tax levels reflect differences in the degree of local political monopoly power resulting from information asymmetries this monopoly power appears to have been used generally but not exclusively to raise tax levels

as certain as debt and taxes estimating the tax sensitivity of leverage from state tax changes abstract using staggered corporate income tax changes across u s states we show that taxes have a first order effect on capital structure firms increase leverage by around 40 basis points for every percentage point tax increase consistent with dynamic tradeoff theory the effect is asymmetric leverage does not respond to tax cuts this is true even within firm tax increases that are later reversed nonetheless lead to permanent leverage increases the treatment effects are heterogeneous and confirm the tax channel tax sensitivity is greater among profitable and investment grade firms which respectively have a greater marginal tax benefit and lower marginal cost of issuing debt

credit default swaps and the empty creditor problem the empty creditor problem arises when a debtholder has obtained insurance against default but otherwise retains control rights in and outside bankruptcy we analyze this problem from an ex ante and ex post perspective in a formal model of debt with limited commitment by comparing contracting outcomes with and without insurance through credit default swaps cds we show that cds and the empty creditors they give rise to have important ex ante commitment benefits by strengthening creditors bargaining power they raise the debtor s pledgeable income and help reduce the incidence of strategic default however we also show that lenders will over insure in equilibrium giving rise to an inefficiently high incidence of costly bankruptcy we discuss a number of remedies that have been proposed to overcome the inefficiency resulting from excess insurance jel g30 g32 g33 one of the most significant changes in the debtor creditor relationship in the

bank firm relationships and contagious banking crises this paper argues that in an open economy a banking system with close bank firm relationships may be easily subject to contagious banking crises because it is difficult to distinguish between crony capitalism and good main bank relationships 1 show that if international investors cannot distinguish the bank type the distinction between crony capitalism and good main bank relationships becomes very fuzzy in particular the model can explain sequences of bank defaults within a country even if the insolvent banks are very few ex ante as well as sequences of banking crises among countries that are equally rated by international investors but indeed differ in the ex ante solvency of their banking system

the need to rethink agricultural policy in general and to perform some radical surgery on commodity programs in particular discussion the topic of this session as i understood it was the role of agricultural economics in the formulation of agricultural policy it is with some trepidation then that i must begin this discussion with a general statement of disappointment concerning what i consider to be cochrane s failure to address that specific topic i do this knowing full well that the author has through his career and in his previous publications and presentations made extremely important contributions in this topical area particularly in his insightful reviews and analyses most recently his 1983 examination of the twenty two year history of the economic research service cochrane 1983 it would seem to this congressional consumer of agricultural policy and economic analysis that some fundamental issues should have been addressed by the author as they relate to where we have been and where we

rent seeking and political tenure first estimates this paper computes a measure of rent seeking based on costs of tenure within a political tenure type model a new incumbency variable is introduced and a variant to existing datasets is presented consistent ml rent seeking estimates are computed for our sample of oecd democracies the statistical advances in limited dependent variable models in particular the decomposition of the tobit estimates enabled us to compute rent seeking estimates as costs of tenure the tobit partial derivatives and to compute the impact of explanatory variables on the probability of being above the limit which we interpret as the probability of tenure

conflicts of interest and market illiquidity in bankruptcy auctions theory and tests i develop and estimate a model of cash auction bankruptcy using data on 205 swedish firms the results challenge arguments that cash auctions as compared to reorganizations are immune to conflicts of interest between claimholders but lead to inefficient liquidations i show that a sale of the assets back to incumbent management is a common bankruptcy outcome sale backs are more likely when they favor the bank at the expense of other creditors on the other hand inefficient liquidations are frequently avoided through sale backs when markets are illiquid that is when industry indebtedness is high and the firm has few nonspecific assets the problem of designing an efficient bankruptcy law has received considerable attention in the last decade much of the debate has centered around the optimality of two different stylized bankruptcy procedures cash auctions such as the u s chapter 7 code and structured bargaining represented by the u s chapter 11 reorganization code recently several european countries including france germany and great britain have changed their bankruptcy regulation by introducing reorganization procedures similar to chapter 11 at the same time the chapter 11 code has been criticized by academics including baird 1986 emphasizing that the bargaining procedure frequently results in long and wasteful negotiations these critics argue that chapter 11 should instead be replaced with a mandatory auction procedure other researchers such as aghion hart and moore 1992 and shleifer and vishny 1992 have pointed out that a cash auction is likely to suffer from considerable inefficiencies arising from transaction costs and market illiquidity the nature and costs of the chapter 11 procedure are

do liquidation values affect financial contracts evidence from commercial loan contracts and zoning regulation we examine the impact of asset liquidation value on debt contracting using a unique set of commercial property loan contracts we employ commercial zoning regulation to capture the flexibility of a property s permitted uses as a measure of an asset s redeployability or value in its next best use within a census tract more redeployable assets receive larger loans with longer maturities and durations lower interest rates and fewer creditors controlling for the property s type sale price and earnings to price ratio these results are consistent with incomplete contracting and transaction cost theories of liquidation value and financial structure

wealth constraints and option contracts in models with sequential investments summary the paper investigates a model where two parties a and b invest sequentially in a joint project an asset investments and the asset value are nonverifiable and a is wealth constrained so that an initial outlay must be financed by either agent b insider financing or an external investor a bank c outsider financing we show that an option contract in combination with a loan arrangement facilitates first best investments and any arbitrary distribution of surplus if renegotiation is infeasible moreover the optimal strike price of the option is shown to dier across financing modes if renegotiation is admitted we identify conditions under which the first best can still be attained then either b financing or c financing may be strictly preferable and a combination of insider and outsider financing may be strictly optimal

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

securitization and mortgage renegotiation evidence from the great depression we use loan level data from the nyc metropolitan area to examine the extent to which lenders attempted to prevent foreclosures with concessionary modi cations during the great depression we nd no principal forgiveness in the sample and only a handful of concessionary mortgage modi cations of other types far more mortgages terminated through foreclosure than received any sort of concessionary modi cation the results indicate that there are signi cant impediments to renegotiation of residential mortgages beyond securitization as such less renegotiation seems unlikely to be a major cost of securitization of residential mortgages

the collateral channel under imperfect debt enforcement does a country s ability to enforce debt contracts affect the sensitivity of economic activity to collateral values to answer this question we introduce a novel industry specific measure of real asset redeployability the ease with which real assets are transfered to alternative uses as a proxy for collateral liquidation values our measure exploits the heterogeneity of expenditures in new and used capital and the heterogeneity in the composition of real asset holdings across u s industries using a cross industry cross country approach we find that industry size and growth are more sensitive to collateral values in countries with weaker debt enforcement our estimates indicate that the differential effect is sizeable the sensitivity of economic activity to collateral values is not affected by a country s financial development once the quality of debt enforcement is accounted for we then rationalize our empirical findings based on a model of credit under imperfect enforcement and discuss an important implication of our empirical result macroeconomic volatility generated by fluctuations in collateral values is higher in countries with weaker debt enforcement institutions

the number and the closeness of bank relationships abstract we analyze a firm s optimal choice over the number of creditors and the extent of information disclosed to them by dealing with many creditors and disclosing essential confidential information a firm can keep its cost of credit low this however is associated with a relatively high probability that valuable information leaks to competitors leading to lower expected net returns from product market operations the importance of these two countervailing effects varies with size time industry and the form of the financial sector which yields a number of empirically testable hypotheses

forced asset sales and the concentration of outstanding debt evidence from the mortgage market we provide evidence that lenders differ in their ex post incentives to internalize price default externalities associated with the liquidation of collateralized debt using the mortgage market as a laboratory we conjecture that lenders with a large share of outstanding mortgages on their balance sheets internalize the negative spillovers associated with the liquidation of defaulting mortgages and thus are less inclined to foreclose we provide evidence consistent with our conjecture arguably as a consequence zip codes with a higher concentration of outstanding mortgages experience smaller house prices declines these results are not driven by unobservable zip code or lender characteristics

distressed exchange bargaining power and prior capital structure abstract financially troubled companies often make distressed exchange de offers to its creditors to postpone costly bankruptcy reorganization we derive the optimal terms and timing of a de offer consisting of debt reduction and an equity stake in the restructured firm the de terms and timing are affected by shareholder bargaining power with greater shareholder bargaining power resulting in earlier de offer smaller debt reduction and smaller equity stake the impact of shareholder bargaining power is greater when bankruptcy cost is larger and tax rate is higher we also show that renegotiability of debt increases ex ante firm value and results in a higher optimal leverage ratio both firm value and optimal leverage ratio are decreasing functions of shareholder bargaining power

default and renegotiation a dynamic model of debt we analyze the role of debt in persuading an entrepreneur to pay out cash e ows rather than to divertthem in the e rstpartof the paper we study the optimal debt contract specie cally the trade off between the size of the loan and the repayment under the assumption that some debt contract is optimal in the second part we consider a more general class of nondebt contracts and derive sufficient conditions for debt to be optimal among these

how do firms choose their lenders an empirical investigation this article investigates which companies finance themselves through intermediaries and which borrow directly from arm s length investors our empirical results show that large companies with abundant cash and collateral tap credit markets directly these markets cater to safe and profitable industries and are most active when riskless rates or intermediary earnings are low we show that determinants of lender selection sharpen during investment downturns and that there are substantial asymmetries in the way firms enter and exit capital markets these results support a theoretical framework where intermediaries have better reorganizational skills but a higher opportunity cost of capital than bondholders

debt and seniority an analysis of the role of hard claims in constraining management we argue that long term debt has a role in controlling management s ability to finance future investments a company with high widely held debt will find it hard to raise capital since new security holders will have low priority relative to existing creditors conversely for a company with low debt we show there is an optimal debt equity ratio and mix of senior and junior debt if management undertakes unprofitable as well as profitable investments we derive conditions under which equity and a single class of senior long term debt work as well as more complex contracts for controlling investment behavior

effect of the number of banking relationships on credit availability evidence from panel data of spanish small firms this paper investigates how the choice between single or multiple banking relationships affects credit availability for a complete panel of small and medium sized spanish firms the results seem to indicate the existence of rationing since a substitution relation has been found between trade and bank credit we also analyse the relationship between the level of indebtedness and the interest rate for each group of firms the results show that those smes that work with fewer financial intermediaries obtain fewer funds for the same increase in the interest rate which indicates that these companies have more financial restraints

investment cash flow sensitivities credit rationing and financing constraints in small and medium sized firms the controversy on whether investment cash flow sensitivity is a good indicator of financing constraints is still unsolved we apply a comprehensive approach by cross validating our analysis with both balance sheet and qualitative data on self declared credit rationing and financing constraints on a sample of mainly small and medium sized firms our qualitative information shows that self declared credit rationing is weakly related to both traditional a priori factors such as firm size age and location and lenders rational decisions taken on the basis of their credit risk models we use the qualitative information on firms which were denied additional credit to provide evidence relevant to the investment cash flow sensitivity debate the evidence shows that self declared credit rationing significantly discriminates between firms which possess or not such sensitivity while a priori criteria do not the same result does not apply when we consider the wider group of financially constrained firms which do not seem to have a higher investment cash flow sensitivity supporting the more recent empirical evidence in this direction