bond indenture provisions and the risk of corporate debt abstract this paper examines the effect of alternative bond indenture provisions on the allocation of risk among the firm s claimants the approach taken here differs from that of earlier studies in that risk allocation is examined while the firm s leverage in market value terms is held constant in this context four indenture provisions are examined 1 the time to maturity 2 the promised payment schedule 3 financing restrictions and 4 priority rules it is concluded that risk is transferred from stockholders to bondholders as the time to maturity and promised payment increase appropriately furthermore substitution of longer term debt for an equal amount of shorter term debt also increases the risk to bondholders while decreasing the risk to stockholders the analysis shows that a coupon bond can be represented by a unique discount bond with the same risk and value this permits the characterization of the effective maturity of a risky debt issue a concept analogous to the stochastic duration of a default free coupon bond these results are shown to be independent of the means used to finance the debt issue finally it is concluded that the relative risk associated with different bonds issued by the same firm cannot be determined by the structure of priority rules alone it is also necessary to consider the timing of the promised payments compared to that of the other debt issues in the firm s capital structure

derivatives of the nodal prices in market power screening abstract this paper proposes a novel method for market power screening this method is developed for horizontally and vertically consolidated power markets and is based on the optimal power flow opf model properties it undertakes the calculation and analysis of a matrix of derivatives of the nodal prices with respect to generating unit offer prices the analysis takes into consideration the influence of particular partakers and energy groups on the nodal prices this paper presents a theoretical analysis of the partakers and groups profits as well as a method for the market power screening moreover the issue wherein the lmp model generates prices above the highest bidding price is discussed illustrative case studies and case studies based on the polish wholesale balancing power market model are also presented

financial intermediary coalitions abstract in this article an environment in which the investment opportunities of agents are private information is studied and it is shown that financial intermediaries arise endogenously within that environment it is established that financial intermediaries are part of an efficient arrangement in the sense that they are needed to support the authors private information core allocations these intermediaries which are coalitions of agents exhibit the following characteristics in equilibrium they borrow from and lend to large groups of agents they produce information about investment projects and they issue claims that have different state contingent payoffs than claims issued by ultimate borrowers

private information deposit interest rates and the stability of the banking system abstract the regulation of deposit interest rates has received little support from economists the same is true for the original rationale for such regulation that bank competition for deposits generates inherent instability in the banking system this paper develops an adverse selection model of banking in which this rationale is correct moreover in this model instability in the banking system can arise despite the presence of a lender of last resort and despite the absence of any need for deposit insurance however in the world described the regulation of deposit interest rates is shown to be an appropriate response to instability in the banking system finally it is argued that adverse selection models of deposit interest rate determination can confront a number of observed phenomena that are not readily explained in other contexts

do banks provide financial slack we study the decision to choose bank debt rather than public securities in a firm s marginal financing choice using a sample of 500 firms over the 1980 to 1993 time period we find that firms are relatively more likely to choose bank loans when variables that measure asymmetric information problems are elevated the sensitivity of the likelihood of choosing bank debt to information problems is greater for firms with no public debt outstanding these results are consistent with the hypothesis that banks help alleviate asymmetric information problems and that firms weigh these information benefits against a wide range of contracting costs when choosing bank financing why do some firms borrow from public sources while others rely exclusively on private lenders the answer to this question is not well understood existing theories suggest that a firm must consider the tradeoff between the benefits and costs of bank debt financing relative to other potential financing choices the potential benefits of bank financing include low moral hazard and adverse selection costs and ease of renegotiation in financial distress 1 the potential costs of bank financing include monitoring costs suboptimal liquidation outcomes and distortions induced by information monopolies 2 the goal of this paper is to identify whether adverse selection problems influence a firm s choice between new bank debt public debt or common stock in particular we are interested in assessing the empirical validity of the hypothesis that banks have the ability to accurately price a firm s claims thus inducing a preference for firms that are undervalued by the market to

the economics of small business finance the roles of private equity and debt markets in the financial growth cycle abstract this article examines the economics of financing small business in private equity and debt markets firms are viewed through a financial growth cycle paradigm in which different capital structures are optimal at different points in the cycle we show the sources of small business finance and how capital structure varies with firm size and age the interconnectedness of small firm finance is discussed along with the impact of the macroeconomic environment we also analyze a number of research and policy issues review the literature and suggest topics for future research

does competition from new equity mitigate bank rent extraction insights from japanese data previous research shows that bank information production mitigates asymmetric information problems however this literature has ignored the concern that firms with better growth prospects are more vulnerable to bank rent extraction this paper points out that funding competition from new equity as an effective natural mechanism solves this important concern using japanese data from 1983 to 1997 we show that the relationship between loan to debt ratio and growth while starting significantly negative consistent with holdup theory turns significantly positive towards the high end of the growth spectrum we confirm that high growth firms raise more new equity than do low growth firms and use more equity relative to bonds in external finance this is consistent with a generalized myers majluf framework these results suggest that for high growth firms when competition from public debt lessens due to increased growth based valuations competition from new equity steps in to restrain bank rent extraction

meaning and credibility in cheap talk games i define neologism proofness a refinement of perfect bayesian equilibrium in cheap talk games it applies when players have a preexisting common language so that an unexpected message s literal meaning is clear and only credibility restricts communication i show that certain implausible equilibria are not neologism proof in some games no equilibrium is journal of economic literature classification numbers d83 d82 c73

promotion signal proxy for a price cut evidence suggests that some consumers react to promotion signals without considering relative price information we adopt petty and cacioppo s elaboration likelihood model elm to explain this behavior in terms of the elm s peripheral route to persuasion in which the promotion signal is taken as a cue for a price cut experimental results show that low need for cognition individuals react to the simple presence of a promotion signal whether or not the price of the promoted brand is reduced but that high need for cognition individuals react to a promotion signal only when it is accompanied by a substantive price reduction

when do banks take equity in debt restructurings this article examines the conditions under which bank lenders make concessions by taking equity in financially distressed firms i show that the role banks play in debt restructurings depends on the financial condition of the firm the existence of public debt in the firm s capital structure and the ability of public debt to be restructured empirically i find that for firms with public debt outstanding banks never make concessions unless public debtholders also restructure their claims when banks do take equity on average they obtain a substantial proportion of the firm s stock and they maintain their position for over two years article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

an iterative lmp calculation method considering loss distributions generally the locational marginal price lmp is obtained by solving a linear programming formulation network losses are considered through the preset loss factors based on historical operation information this usually brings errors in the calculated loss under different new scenarios further the congestion component of an lmp is dependent on the choice of the reference bus in this paper a new iterative lmp calculation method is proposed to overcome the aforementioned two drawbacks associated with the traditional lmp calculations at each iteration a linear programming problem for market clearing is solved first losses on branches are considered as fictitious nodal demands at their terminal buses secondly the ac power flow is calculated according to the dispatch results loss factors and fictitious nodal demands are then updated according to the ac power flow solution thus removing the need and dependence on presetting loss factors another important merit is that lmp and its congestion component obtained from the proposed iterative lmp calculation method are independent of choice of the reference bus the effectiveness of the proposed method is illustrated on two benchmark systems the importance of obtaining accurate losses and lmps is also demonstrated

lending to small businesses the role of loan maturity in addressing information problems we investigate what determines the maturity of lines of credit to small businesses our results provide strong support for the hypothesis that shorter loan maturities serve to mitigate the problems associated with borrower risk and asymmetric information that are typical of small business lending we find that maturity is shorter for firm owners that have poor credit histories are older and less experienced and for firms that are more informationally opaque supporting the notion that collateral and maturity are substitute mechanisms in mitigating agency problems we also find strong evidence that maturity increases with collateral pledges that personal collateral is associated with longer maturities than business collateral and that collateral types that better mitigate agency problems reduce the sensitivity of loan maturity to informational asymmetries and risk finally while it is argued that relationship lending may mitigate information asymmetry we find no relation between loan maturity and stronger firm creditor ties

bank information monopolies and the mix of private and public debt claims this article examines the determinants of the mix of private and public debt using detailed information on the debt structure of 250 publicly traded corporations from 1980 through 1990 we find that the relationship between bank borrowing and the importance of growth opportunities depends on the number of banks the firm uses and whether the firm has public debt outstanding for firms with a single bank relationship the reliance on bank debt is negatively related to the importance of growth opportunities in contrast among firms borrowing from multiple banks the relationship is positive

a comprehensive assessment of the evolution of financial transmission rights financial transmission rights ftrs are complementary to the locational marginal pricing of energy the basic aim of the ftr mechanism is to guard forward contracts from uncertain congestion charges ftrs are also useful to individual generators and loads for selling and buying power respectively at the prices of other locations the concept has evolved encompassing many features such as a simultaneous feasibility test various ways to conduct auctions and allocations and secondary trading ftrs also have a close relation to market power and transmission investment this paper reviews most of the landmark research papers on the evolution of the ftr concept it reports a comprehensive assessment of various facets of ftrs and allied issues financial transmission rights and flowgate rights fgrs are compared the concept of long term ftrs is discussed the paper also touches upon future proposals in this area

syndicated lending under asymmetric creditor information abstract this paper explores how asymmetric information about borrower quality among syndicated lenders alters the incentive to refinance illiquid borrowers we use a model in which lenders enter the market sequentially in two rounds of lending between the two rounds a shock separates borrowers into good ones and bad ones and early entrants acquire information about individual borrower type while late entrants know only the distribution of borrower types the asymmetric information structure gives rise to both signalling and screening issues we show that self selecting contracts do not exist and that there is always a pooling perfect bayesian equilibrium in which late entrants lend to both good and bad types without borrower type being exposed before final clearing at the terminal time based on this framework we argue that prior to the 1982 international debt crisis it was possible for banks with heavy exposure to troubled debtors to attract rational newcomers in syndicated loans which were with positive probability bailout loans

costly monitoring financial intermediation and equilibrium credit rationing abstract this paper establishes a link between equilibrium credit rationing and financial intermediation in a model with asymmetrically informed lenders and borrowers costly monitoring and investment project indivisibilities intermediation is shown to dominate borrowing and lending between individuals and these financial intermediaries exhibit several of the important features of intermediaries as we know them equilibrium interest rates and the aggregate quantity of loans respond quite differently to changes in taste and technology parameters depending on whether or not there is rationing in equilibrium

reputation and imperfect information abstract a common observation in the informal literature of economics and elsewhere is that is multistage games players may seek early in the game to acquire a reputation for being tough or benevolent or something else but this phenomenon is not observed in some formal game theoretic analyses of finite games such as selten s finitely repeated chain store game or in the finitely repeated prisoners dilemma we reexamine selten s model adding to it a small amount of imperfect or incomplete information about players payoffs and we find that this addition is sufficient to give rise to the reputation effect that one intuitively expects

investment ramifications of distortionary tax subsidies abstract this paper examines the investment effects of tax subsidies for which some assets and not others are eligible distortionary tax subsidies concentrate investments in tax favored assets thereby reducing the expected pre tax profitability of investment and reducing payoffs to bondholders in the event of default anticipation of asset substitution encourages lenders to require covenants in debt contracts which only imperfectly address asset substitution and distort investment the result is that borrowing is made more expensive which in turn discourages investment borrowing rates can react so strongly that aggregate investment may rise very little or even fall in response to higher tax subsidies debt issued by u s firms in risk of default after the 2002 introduction of bonus depreciation for u s equipment investment contained many more covenants than in other periods a pattern that reversed when bonus depreciation was discontinued after 2004 furthermore firms at risk of default borrowed less and were more apt to lease capital than were other firms during the bonus depreciation period

defensive marketing strategies this paper analyzes how a firm should adjust its marketing expenditures and its price to defend its position in an existing market from attack by a competitive new product our focus is to provide usable managerial recommendations on the strategy of response in particular we show that if products can be represented by their position in a multiattribute space consumers are heterogeneous and maximize utility and awareness advertising and distribution can be summarized by response functions then for the profit maximizing firm it is optimal to decrease awareness advertising it is optimal to decrease the distribution budget unless the new product can be kept out of the market a price increase may be optimal and even under the optimal strategy profits decrease as a result of the competitive new product furthermore if the consumer tastes are uniformly distributed across the spectrum a price decrease increases defensive profits it is optimal at the margin to improve product quality in the direction of the defending product s strength and it is optimal at the margin to reposition by advertising in the same direction in addition we provide practical procedures to estimate 1 the distribution of consumer tastes and 2 the position of the new product in perceptual space from sales data and knowledge of the percent of consumers who are aware of the new product and find it available competitive diagnostics such as the angle of attack are introduced to help the defending manager this article was originally published in marketing science volume 2 issue 4 pages 319 360 in 1983

information reliability and a theory of financial intermediation this paper is an analysis of when it will be beneficial for agents engaged in the production of information to form coalitions the model is cast in a financial market framework thus leading to an identification of conditions sufficient for the existence of financial intermediaries intermediation is shown to improve welfare if informational asymmetries are present and the information generated to rectify these asymmetries is potentially unreliable the usual appeal to transactions costs to explain intermediation is not needed

bond covenants and delegated monitoring this paper examines alternative contracting arrangements available to a firm seeking to finance an investment project the authors consider the choice between loan contracts with covenants based on noisy indicators of the firm s financial health and loan contracts enforced by a monitoring specialist in one interpretation the specialist is a financial intermediary the firm s choice is shown to depend upon the firm s credit rating the accuracy of financial indicators of the firm s condition the loss from premature liquidation of the firm s project and the cost of monitoring

an equilibrium market power model for power markets and tradable green certificates including kirchhoff s laws and nash cournot competition abstract we investigate the economic impacts of introducing tradable green certificates to promote electricity produced from renewable energy sources we formulate a mixed complementarity multi region partial equilibrium model clearing both the electricity and green certificate markets under the assumption of nash cournot market competition we introduce a mixed complementarity formulation of the tradable green certificate policy scheme the main contribution of this paper is to combine a public support scheme for electricity production with a power market model in which strategic generators compete and exercise market power in a capacitated transmission network with spatial energy exchange any policy instrument interfering with the free market solution in a partial equilibrium model will reduce social welfare as a result of deadweight losses from the policy these welfare losses may be substantial we show that losses from tradable green certificates influence different market actors depending on the market conditions but existing firms are likely to bear most of these losses in markets with cournot competition where producers act strategically green certificates help to increase market competition if new firms are able to enter the market existing firms will not be motivated to compete with new generation capacity the consumer surplus from introducing tradable green certificates under cournot competition may increase despite the deadweight losses the policy incurs

financial contracting and the choice between private placement and publicly offered bonds the financial contracting in private placement bonds and publicly offered bonds are different our data show that private placement bonds are more likely to have restrictive covenants than public bonds private placement bonds are also more likely to be issued by smaller and riskier firms for investment grade firms that issue bonds in both markets our analysis shows that firms select the bond type to minimize financing costs we find significant differences in the pricing of private placement and publicly offered bonds and some of these differences appear to be related to the different institutional features between the two markets

signaling strategies in competitive interaction building reputations and hiding the truth abstract the authors develop a conceptual framework of how managers interpret competitors signals over time in various market contexts from the framework the authors generate hypotheses about the relative effectiveness of signaling strategies used by firms in different market contexts the authors conducted two empirical studies involving a repeated entry pricing game to test the hypotheses the results of study 1 show that the entrant s perceptions of the aggressiveness of the incumbent depend on the focus and strength of the incumbent s signals the results of study 2 show that the strength of the entrant s responses to the incumbent s signals depends on the incumbent s use of bluffs and the cost of information about the factors driving the incumbent s signals the implications of these findings for how firms should signal to achieve such strategic objectives as revealing or concealing information developing a desired reputation and influencing competitors responses over time are discussed the au

deregulation disintermediation and agency costs of debt evidence from japan abstract many japanese firms reduced dependence on banks following financial deregulation in the 1980s the financial architecture of japanese firms after liberalization provides an opportunity to investigate the choice of financing with public bonds versus monitored bank loans examination of accounting and stock price data for a sample of japanese firms in the late 1980s suggests that debt structure is related to variables that serve as proxies for agency costs of debt in particular we find that the proportion of bond debt is inversely related to growth opportunities while the proportion of bank debt is positively related to growth opportunities

dc power flow revisited linear mw only ldquodcrdquo network power flow models are in widespread and even increasing use particularly in congestion constrained market applications many versions of these approximate models are possible when their mw flows are reasonably correct and this is by no means assured they can often offer compelling advantages given their considerable importance in today s electric power industry dc models merit closer scrutiny this paper attempts such a re examination

financial intermediation and delegated monitoring this paper develops a theory of financial intermediation based on minimizing the cost of monitoring information which is useful for resolving incentive problems between borrowers and lenders it presents a characterization of the costs of providing incentives for delegated monitoring by a financial intermediary diversification within an intermediary serves to reduce these costs even in a risk neutral economy the paper presents some more general analysis of the effect of diversification on resolving incentive problems in the environment assumed in the model debt contracts with costly bankruptcy are shown to be optimal the analysis has implications for the portfolio structure and capital structure of intermediaries

an empirical analysis of the determinants of corporate debt ownership structure i examine the relation between corporate debt ownership structure and several firm characteristics suggested by recent theory the results demonstrate the importance of monitoring and information costs the likelihood and costs of inefficient liquidation and borrowers incentives in affecting firms debt source preferences several theoretical predictions receive support while others do not the results also suggest important differences between bank and private non bank debt which contrasts with most theoretical models additionally i find evidence of systematic use of bank debt by firms with access to public debt suggesting the benefits attributed to bank debt in theoretical models remain important after firms gain access to public debt markets although different lenders appear to have different maturity preferences the results also suggest debt maturity and debt ownership decisions may be separable

a more complete conceptual framework for sme finance abstract we propose a more complete conceptual framework for analysis of sme credit availability issues in this framework lending technologies are the key conduit through which government policies and national financial structures affect credit availability we emphasize a causal chain from policy to financial structures which affect the feasibility and profitability of different lending technologies these technologies in turn have important effects on sme credit availability financial structures include the presence of different financial institution types and the conditions under which they operate lending technologies include several transactions technologies plus relationship lending we argue that the framework implicit in most of the literature is oversimplified neglects key elements of the chain and often yields misleading conclusions a common oversimplification is the treatment of transactions technologies as a homogeneous group unsuitable for serving informationally opaque smes and a frequent misleading conclusion is that large institutions are disadvantaged in lending to opaque smes

alternative information sources and the information content of bank loans this paper examines the information content of bank loan agreements we differentiate borrowers according to financial analysts percentage earnings forecast errors and most recent forecast revisions the empirical results suggest that banks rely on other indicators as initial screening devices to determine where to best deploy their evaluation and monitoring efforts if these other indicators are reliable and signalimproving prospects banks do little further investigation however if the indicators are noisy and signal declining prospects banks have incentives to expend resources to investigate the borrowers resulting in the production of valuable information recent theories of financial intermediation concentrate on the role of banks in reducing informational asymmetry leland and pyle 1977 suggest that informational asymmetries may be the primary reason that intermediaries exist campbell and kracaw 1980 demonstrate that an important function of financial intermediation is the production of information diamond 1984 develops a model which shows that financial intermediaries can exist simply because they provide an efficient means of evaluating and monitoring borrowers these information transmission theories argue that banks provide unique information production services in an imperfect capital market they suggest that banks know more about the prospects of the firms they lend to than do others thus bank loan agreements should convey useful information to the market a number of researchers empirically examine the uniqueness of bank loans fama 1985 approaches the issue by examining the rates on certificates of deposit and other high grade commercial papers he concludes that since bank borrowers bear the cost of reserve requirements there must be something special about bank loans james 1987 conducts an event study around the announcement of bank credit agreements and reports a significantly positive two day announcement return his results provide evidence support

market implications and pricing of dynamic reserve policies for systems with renewables static reserve policies are used within security constrained unit commitment scuc and security constrained economic dispatch sced to ensure reliability a common policy is that 10 min reserve must exceed the largest contingency however this condition does not guarantee reliability because voltage and thermal limits can hinder reserve deliverability many operators use zonal reserve markets to ensure reserves are dispersed across the grid such zonal models attempt to anticipate transmission bottlenecks which is a difficult task when the future system state is uncertain this paper examines the market implications of dynamic reserve policies used to mitigate uncertainty from renewable resources and contingencies we study the market implications of policies recently proposed in the literature such as hourly zones within day ahead scuc and an algorithm that formally disqualifies reserves that are expected to be undeliverable a locational reserve pricing scheme is also proposed in connection with scenario based reserve disqualification analysis on the rts 96 test case shows that dynamic zones and reserve disqualification along with the proposed compensation scheme help direct reserve payments toward resources that more effectively respond to contingencies

transmission management for congested power system a review of concepts technical challenges and development of a new methodology transmission networks have some constraints that should be addressed in order to ensure sufficient control to maintain the security level of a power system while maximising market efficiency the most obvious drawback of transmission constraints is a congestion problem that becomes an obstacle to perfect competition among the market participants since it can influence spot market pricing as the power flow violates transmission constraints redispatching generating units is required and this will cause the price at every node to vary this manuscript presents concepts technical challenges and methodology for investigating an alternative solution to the redispatch mechanism and then formulates lmp scheme using an optimisation technique that may well control congestion as the main issue the lmp scheme are varied and improved to take into account the energy price congestion revenue cost of losses as well as the transmission usage tariff by utilising shift factor based optimal power flow sf opf which is derived from the well known dc optimal power flow dc opf model

predation reputation and entry deterrence abstract economists often argue that predatory practices are irrational since there exist cheaper or more certain means to gain or maintain a monopoly our gametheoretic equilibrium analysis suggests that if a firm is threatened by several potential entrants then predation may be rational against early entrants even if it is costly when viewed in isolation because it yields a reputation which deters other entrants asymmetric information plays a crucial role in our analysis since it provides the rationale for entrants to base their expectations of the firm s future behavior on its past actions the analysis also suggests methods to treat general reputational phenomena

inverse optimization for the recovery of market structure from market outcomes an application to the miso electricity market we propose an inverse optimization based methodology to determine market structure from commodity and transportation prices the methods are appropriate for locational marginal price based electricity markets where prices are shadow prices in the centralized optimization used to clear the market we apply the inverse optimization methodology to outcome data from the midcontinent iso electricity market miso and under noise free assumptions recover parameters of transmission and related constraints that are not revealed to market participants but explain the price variation we demonstrate and evaluate analytical uses of the recovered structure including reconstruction of the pricing mechanism and investigations of locational market power through the transmission constrained residual demand derivative prices generated from the reconstructed mechanism are highly correlated to actual miso prices under a wide variety of market conditions in a case study the residual demand derivative is shown to be corr

transfer capability improvement through market based operation of series facts devices traditionally electric system operators have dispatched generation to minimize total production costs ignoring the flexibility of the transmission system implementation of smart grid systems could allow operators to co optimize flexible transmission alongside generation dispatch the technologies that would enable such co optimization are still regulated as part of the monopoly transmission system one particular flexible transmission asset is variable impedance flexible ac transmission system facts this paper 1 points out the positive externality problem existing in a recent market design proposal with active transmission participation and 2 proposes a sensitivity based method to estimate the marginal market value of facts adjustments to overcome this positive externality problem the marginal value would suggest efficient impedance adjustments to the operator and provide the right financial incentives for the facts owners to operate their assets in a socially optimal way revenue adequacy is demonstrated under specific conditions and more broadly investigated through simulation studies an analytical example on a two bus system as well as a numerical study on the ieee 118 bus system are presented the results suggest that inclusion of a price signal for facts devices would lead to significant social welfare improvements in competitive power markets

talk is cheap although friedrich a von hayek leonid hurwicz and others stressed how the price system communicates private information on preferences technology and endowments our main means of communication is surely words but it is unclear whether mere words can be trusted absent outside sanctions for lying such as perjury law or a valuable reputation for honesty talk is cheap the perspective of the standard theory of signaling seems to suggest that cheap talk should be uninformative but this is misleading cheap talk can sometimes convey information and affect real payoffrelevant actions yet cheap talk s power is limited for example even given an unlimited chance to talk rational people may not reach an equilibrium or may not escape a bad one a growing literature in game theory political science and economics which i cannot survey here studies what cheap talk can and cannot do here i merely sketch some themes

on the positive role of financial intermediation in allocation of venture capital in a market with imperfect information this paper develops a theory of financial intermediation that highlights the contribution of intermediaries as informed agents in a market with imperfect information we consider a venture capital market where the entrepreneurs select the qualities of projects and their perquisite consumptions about which the investors are imperfectly informed it is shown that when all investors have positive search costs the entrepreneurs are induced to offer the unacceptable inferior projects lemons only and the investors will not enter the venture capital market but put their funds in other low return investments an undesirable allocation of resources beginning with an initial undesirable situation the financial intermediaries may evolve as informed agents that induce a pareto preferred allocation leading the investors to a higher welfare state we focus our analysis on the existence of intermediation equilibra when the market for intermediation services is competitive the distribution of returns on projects the fees charged by intermediaries and the fraction of institutional holdings are all endogenous in equilibrium it is shown that i there cannot be a competitive intermediation equilibrium with very high institutional holdings and ii in other cases multiple equilibra may exist but the one with the highest institutional holdings dominates the others in a pareto sense

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

valuation and systemic risk consequences of bank opacity abstract we examine the effects of opacity on bank valuation and synchronicity in bank equity returns over the years 2000 2006 prior to the 2007 financial crisis as expected investments in opaque assets are more profitable than investments in transparent assets and taking profitability into account have larger valuation discounts relative to transparent assets the valuation discounts on opaque asset investments decline over the 2000 2006 period only to be followed by a sharp reversal in 2007 the decline is coincident with a rise in bank equity share prices decrease in transparent asset holdings by banks and greater return synchronicity evidence consistent with a feedback effect

competitive bluffing an examination of a common practice and its relationship with performance bluffing a common and consequential form of competitive behavior has been comparably ignored in the management literature even though misleading one s rivals is suggested to be an advantageous skill in a multifaceted and highly competitive environment to address this deficiency and advance scholarship on competitive dynamics our study investigates the moral reasoning behind competitive bluffing and using a simulated market entry game examines the performance effects of bluffing findings suggest that decision makers views on the ethicality of bluffing competitors differ from their beliefs on the ethicality of misleading other organizational stakeholders analysis also indicates that decision makers who view competitor bluffing as more ethical less unethical are more willing to engage in competitive bluffing finally while bluffing is often thought to be an effective business practice results show that in the context of repeated interaction bluffing is not conducive to high levels of performance and in fact can have undesirable consequences

communication between rational agents abstract conventional game theoretic solution concepts never guarantee meaningful communication in cheap talk games i define a solution concept which does guarantee communication in some games i assume full rationality without imposing equilibrium conditions but add a natural behavioral assumption about how agents use language agents have a propensity to speak the truth and to believe others speak the truth but use the game s strategic incentives to check whether such behavior and beliefs are rational i also define and prove the existence of an equilibrium version of the concept and present examples where its predictions seem more natural than farrell s neologism proof equilibrium

don t rest on your laurels reputational change and young technology based ventures abstract we combine resource based theory and social cognition theory to investigate the factors both limiting and related to between period reputational change of young firms in a dynamic technology based industry an analysis of computer graphics chipmakers during the period 1992 2003 provides evidence that operational signals are related to reputational change specifically receiving a product award in the current period is associated with positive change and gaps in product announcements are associated with negative change we find little support for our hypothesis that the reputations of older firms are less likely to change

bank loan terms and conditions for eurozone smes the evolution of bank loan price and non price terms and conditions t cs for the 2009 2011 period are investigated using firm level survey data for a sample of eurozone small and medium sized enterprises the raw firm responses which are of a discrete nature denoting tightening or easing of the t cs or no change at all are modeled by a bivariate ordered probit model according to the results obtained there are sizeable differences between countries with the protagonists of the sovereign debt crisis greece ireland portugal spain exhibiting predicted probabilities of tightening that are considerably above the eurozone average in addition price t cs exhibit a substantial tightening over time finally firms net interest expenses and profitability emerge as important determinants in explaining the cross sectional variation in bank loan t cs that they face

collateral and the choice between bank debt and public debt this paper tests how collateral value affects a firm s choice between bank debt and public debt by considering the exogenous variation in the market value of a firm s real estate assets caused by fluctuations in local real estate prices using local land supply elasticities as an instrument for local real estate prices i estimate that a one standard deviation increase in collateral value causes bank debt as a fraction of total debt to increase by six percentage points this paper was accepted by wei jiang finance

some evidence on the uniqueness of initial public debt offerings debt initial public offerings ipos represent a major shift in a firm s financing policy by both extending debt maturity and altering the public private debt mix in contrast to findings for seasoned debt offerings we document a significantly negative stock price response to debt ipo announcements this result is consistent with debt maturity and debt ownership structure theories the equity wealth effect is negatively related to the offer s maturity and positively related to the degree of bank monitoring we find that firms with less information asymmetry and firms with higher growth opportunities experience a less adverse stock price response the decision to access the public debt market for the first time represents a major change in a firm s financing policy an initial public debt offer alters the firm s debt structure in two significant ways not only does this policy choice affect the firm s debt ownership structure by altering its mix of public relative to private debt but it also extends the average debt maturity of the firm substantially this study provides empirical evidence on the validity of some important debt structure theories by focusing on the information content of initial public debt offers debt ipos two major strands of theories have evolved in the literature the debt ownership choice theories model corporate choice of private and public debt mix see e g fama 1985 diamond 1991a and rajan 1992 while the other set of theories models corporate debt maturity choice easterbrook 1984 flannery 1986 and kale and noe 1990 a number of recent studies empirically test some of the predictions of these models barclay and smith 1995 guedes and opler 1996 houston and james 1996 johnson 1997 and stohs and mauer 1996

corporate financial policy and the theory of financial intermediation this paper examines the optimal structure of financial contracts in an economy subject to two forms of moral hazard multiple information problems are shown to generate a role for multiple classes of financial claimants we then show that economic efficiency is enhanced if the financial structure of the economy consists of both direct and intermediated financial contract markets consequlently our results demonstrate a motivation for the complementarity between capital markets and depository financial institutions the purpose of this paper is to provide an analysis of the complementary roles of direct financial contract markets and intermediated financial contract markets in the modern theory of corporate finance the need to formulate such a model has been emphasized elsewhere by stiglitz 1985 and fama 1985 among others however an adequate explanation of this phenomenon has yet to be formulated the model described in this paper focuses on the role of multiple information problems in a theory of complex financial structure specifically in an environment with private action i e unobservable investment allocations and private information i e partially unobservable project cash flows multiple claimant classes arise to resolve the separate inefficiencies induced by moral hazard in our model the interaction of project risk and observability creates investment distortions which can be mitigated by increasing the number of outside claimant classes our results demonstrate explicitly the way in which a firm s optimal financial structure depends on the assumed configuration of an investment project s risk and observability characteristics under certain conditions we show that the optimal contractuai allocation in an economy with only direct financial contract markets consists of a debt contract and an outside equity claim this contractual configuration restores the efficient investment allocation decision we then consider the feasibility of an intermediated financial contract market in this setting we show that the existence of an intermediated financial contract market improves economic efficiency due to the reduced aggregate costs of

signals and choices in a competitive interaction the role of moves and messages this study examines the effect of signals from a competitor on the decisions of managers in a situation of strategic interdependence the context is a multi period pricing simulation and the payoffs are structured in accordance with a prisoner s dilemma the signals consist of messages from the competitor and observations of the pricing decisions made by the competitor the managers responses to particular types of signals and particular combinations of moves and messages change over the course of the simulation suggestions for future research on competitive signaling are offered

the interdependence between transmission switching and variable impedance series facts devices high congestion costs and new congestion patterns formed by intermittent renewable generation demand for more efficient utilization of the transmission system transmission switching ts and variable impedance series facts devices are two technologies that provide such efficiency gains through controlling the power flows as the system operators begin to utilize these tools it is essential to understand the interdependence between them at various stages such as planning and operation this paper develops an optimal power flow framework that incorporates both facts and ts to study the link between the two power flow control technologies the simulation results on an rts 96 bus system suggest that 1 substantial economic savings can be achieved through utilization of both ts and facts beyond the independent capabilities of each technology 2 performing ts actions affect the optimal location and set point of facts devices and 3 operation of facts devices affect the location and frequency of ts actions it is thus essential to acknowledge the interdependence between the two technologies both at the planning and operation stage failure to do so will lead to economic inefficiencies that can be avoided through co optimization of generation dispatch ts and facts

the maturity structure of corporate debt we provide an empirical examination of the determinants of corporate debt maturity our evidence offers strong support for the contracting cost hypothesis firms that have few growth options are large or are regulated have more long term debt in their capital structure we find little evidence that firms use the maturity structure of their debt to signal information to the market the evidence is consistent however with the hypothesis that firms with larger information asymmetries issue more short term debt we find no evidence that taxes affect debt maturity

what determines outstanding corporate debt mix evidence from fractional multinomial logit estimation abstractthis study employs the fractional multinomial logit setting proposed by papke and wooldridge 1996 to examine factors driving the choice among nonbank private 144a debt bank loans and public debt made by 988 nonfinancial firms during 1993 2007 we document that the majority of firm level factors have persistent effects on corporate outstanding debt mix across economic conditions we also highlight the importance of macroeconomic variables on firms borrowing decisions as predicted by diamond 1991 finally we document a substitution effect among debt financing sources due to credit rating downgrades which is inconsistent with rauh and sufi 2010

assessment of market flows for interregional congestion management in electricity markets this paper gives the background and role of the market flow in the interregional congestion management process for market based operating entity and describes the market flow methodology it proposes that the market flow method calculates the same impact result on a flowgate as the unit dispatch system uds flow does and proves it mathematically the equivalence of market flow and uds flow shows that the uds flow change on a constraint due to the uds binding will have the same effect on the change in the market flow under the electricity market operations in addition it proves that in an interconnected system the sum of the market flows of all of the market entities the generation to load impacts of nonmarket entities and the total tagged transaction impact among the entities is equal to the dc flow for any constraint the assessment of market flow methodology demonstrates the effectiveness of using the market flow in the congestion management process and coordinated management of transmission constraints the proposed methodology can help identify the cause of loop flow problem in power systems the numerical results on a 23 bus test system and a 7917 bus system are also illustrated

a new methodology for cost allocation of transmission systems in interconnected energy markets this paper presents a new methodology for allocating transmission system costs in single or interconnected energy markets initially the proposed method allows the decomposition of the total transmission cost into two components the first corresponds to the utilized network capacity estimated at a specified operating condition and the second refers to the transmission capacity available but not used in the system a technique for decomposing nodal tariffs per subsystem guarantees the applicability of the method to interconnected markets from the proposed procedure it is possible to determine the responsibility of each participant or group of participants in the use of any specified set of transmission elements the flexibility of this method allows the establishment of criteria based on economic and technical aspects for cost allocation of internal circuits of each subsystem as well as of the tie elements between the subsystems important characteristics of the proposed methodology such as transparency impartiality and flexibility are analyzed and illustrated based on numerical applications with the ieee reliability test system experience with the brazilian transmission network is also discussed