ceilings on interest rates and investment the example of greece this paper examines the influence of credit conditions on private investment under financial repression in greece three flexible accelerator investment specifications are estimated alternative measures are tried for the dependent and independent variables the reported equations are selected by a simple sequential specialization procedure the empirical results confirm the existence of an important but lagged effect of bank finance on investment this reflects credit rationing due to interest rate controls in the greek banking system various arguments from the financial repression literature are invoked to justify the finding of a positive sign on the user cost variables in the investment equations copyright 1993 by mit press

seasonality leading indicators and alternative business cycle theories rolling regressions and granger causality tests are used to examine the predictive ability of seasonally adjusted and unadjusted leading economic indicators for the us economy many of the unadjusted variables perform better than their adjusted counterparts but asymmetric behaviour is also evident alternative leading indicators such as the bond spread and the fed funds rate do not predict cycles as well as real money balances unadjusted real business failure liabilities and business formation also appear to perform well

prediction of financial distress for multinational corporations panel estimations across countries this research predicts ex ante financial distress and analyses the link between financial distress performance employment and research and development r d investment in the case of multinatio

credit risk drivers evaluating the contribution of firm level information and of macroeconomic dynamics abstract understanding if credit risk is driven mostly by idiosyncratic firm characteristics or by systematic factors is an important issue for the assessment of financial stability by exploring the links between credit risk and macroeconomic developments we observe that in periods of economic growth there may be some tendency towards excessive risk taking using an extensive dataset with detailed information for more than 30 000 firms we show that default probabilities are influenced by several firm specific characteristics when time effect controls or macroeconomic variables are also taken into account the results improve substantially hence though the firms financial situation has a central role in explaining default probabilities macroeconomic conditions are also very important when assessing default probabilities over time

refinancing profitability and capital structure abstract we revisit the well established puzzle that leverage is negatively correlated with measures of profitability in contrast we find that at times when firms are at or close to their optimal level of leverage the cross sectional correlation between profitability and leverage is positive at other times it is negative these results are consistent with dynamic trade off models in which infrequent capital structure rebalancing is optimal the time series of market leverage and profitability in the quarters prior to rebalancing events match the patterns predicted by these models our results are not driven by investment layouts market timing payout or mechanical mean reversion of leverage

the cyclical behavior of prices abstract the procyclical behavior of prices has been a staple of business cycle lore since the work of the early nber business cycle researchers this paper reexamines that empirical fact the aggregate data do not support procyclical price movements as a stable feature of the business cycle the only episode where it is a robust feature of the data is the period between the two world wars particularly the period of the great depression

does altruism undermine existence value abstract the debate over the use of contingent valuation for existence values or passive use values has failed to explore the validity of motives for such values one potential motive altruism has conflicting implications for benefit cost analysis depending on whether the altruist is paternalistic this paper constructs models of three types of altruism and shows how benefit cost analysis responds to each type of altruism how damage assessment and restoration depend on each type and the implications of a population of heterogeneous altruists

measuring the default risk of small business loans a survival analysis approach in this paper we report that although medium maturity loans originated under the sba 7 a loan guarantee program are targeted to small firms that fail to obtain credit through conventional channels the default experience is comparable to that of a large percentage of loans held by larger commercial banks we establish that the default behavior of these loans is time sensitive as a loan seasons the likelihood of default increases initially peaks in the second year and declines thereafter using a discrete time hazard framework we show that the likelihood of default is conditional on borrower lender and loan characteristics and changes in economic conditions

price flexibility credit availability and economic fluctuations evidence from the united states 1894 1909 the importance of disturbances in financial markets for real economic activity and the positive association between price level and output movements typically are explained by appeal to a combination of nominal aggregate demand shocks particularly money supply shocks and rigid prices we argue that this view is inconsistent with evidence for short run responsiveness of prices and gold flows to nominal disturbances during the pre world war i gold standard era we offer an alternative explanation that connects financial markets and real activity through disturbances to the availability of credit this approach links comovements in prices and output through real effects in credit markets associated with price level shocks empirical analysis using monthly data for the pre world war i period supports the assumption of rapid price adjustment and the credit supply interpretation of the transmission of financial shocks disturbances to credit availability including price shocks contribute substantially to our empirical explanation of output fluctuations during this period

bank lending policy credit scoring and the survival of loans to evaluate loan applicants banks increasingly use credit scoring models the objective of such models typically is to minimize default rates or the number of incorrectly classified loans thereby they fail to take into account that loans are multiperiod contracts for which reason it is important for banks not only to know if but also when a loan will default in this paper a bivariate tobit model with a variable censoring threshold and sample selection effects is estimated for 1 the decision to provide a loan or not and 2 the survival time of granted loans the model proves to be an effective tool to separate applicants with short and with long survival times the bank s loan provision process is shown to be inefficient loans are granted in a way that conflicts with both default risk minimization and survival time maximization there is thus no trade off between higher default risk and higher return in the lending policy

financial factors in the great depression eginning with irving fisher 1933 and john maynard keynes 1931 b 1963 macroeconomists have argued that financial markets were important sources and propagators of decline during the great depression turning points during the depression often coincided with or were preceded by dramatic events in financial markets stock market collapse waves of bankruptcy and bank failure and contractions in the money stock but the mechanism through which financial factors contributed to the depression has been a source of controversy as has been the relative importance of financial factors in explaining the origins and persistence of the depression this essay reviews the literature on the role of financial factors in the depression and draws some lessons that have more general relevance for the study of the depression and for macroeconomics i argue that much of the recent progress that has been made in understanding some of the most important and puzzling aspects of financial real links in the depression followed a paradigm shift in economics a central neglected theoretical piece of the story for financial factors was the allocative effects of imperfections in capital markets which can imply links between disruptions in financial markets and subsequent economic activity also the increasing emphasis on learning and path dependence in economics has helped to explain why financial shocks during the 1930s were so severe and why policy makers failed to prevent the depression

hidden effects of bank recapitalizations abstract given the importance of capital regulation in the banking industry how and why a bank s behavior reacts to a recapitalization has profound consequences to this end we investigate the effects of 306 seasoned equity offerings seos conducted by listed european banks between 2002 and 2014 we use propensity score matching and find that seos lead to asset expansion as opposed to any deleveraging further we find a decrease in lending in the short term followed by a subsequent increase a reduction in profitability and an increase in systemic risk regulators might not have fully considered this last negative externality when they imposed the tougher basel iii capital requirements the effects of seos strongly depend on the reasons behind the recapitalizations

variable selection and corporate bankruptcy forecasts abstract we investigate the relative importance of various bankruptcy predictors commonly used in the existing literature by applying a variable selection technique the least absolute shrinkage and selection operator lasso to a comprehensive bankruptcy database over the 1980 2009 period lasso admits the majority of campbell et al 2008 predictive variables into the bankruptcy forecast model interestingly by contrast with recent studies some financial ratios constructed from only accounting data also contain significant incremental information about future default risk and their importance relative to that of market based variables in bankruptcy forecasts increases with prediction horizons moreover lasso selected variables have superior out of sample predictive power and outperform 1 those advocated by campbell et al 2008 and 2 the distance to default from merton s 1974 structural model

world steel production a new monthly indicator of global real economic activity this paper proposes world steel production as an indicator of global real economic activity world steel production data is published with only a one month delay thereby providing timely information for world real gdp forecasters we find that world steel production and lutz kilian s 2009 index of global real economic activity generate large gains in forecasting world real gdp relative to an autoregressive benchmark a forecast combination of world steel production kilian s 2009 index of global real economic activity and an index of the industrial production of oecd countries plus six non oecd emerging economies produces significant gains in forecasting world real gdp relative to an autoregressive benchmark

is financial globalization beneficial this lecture examines whether financial globalization is beneficial to developing countries by first examining the evidence on financial development and economic growth and concludes that financial development is indeed a key element in promoting economic growth it then asks why if financial development is so beneficial it often does not occur it then goes on to examine whether globalization particularly of the financial kind can help encourage financial and economic development and argues that it can however financial globalization does not always work to encourage economic development because it often leads to devastating financial crises the issue is thus not whether financial globalization is inherently good or bad but whether it can be done right

how does the stock market view bank regulatory capital forbearance policies during the subprime crisis the fdic has shown once again laxity in resolving and closing insolvent institutions ronn and verma 1986 call the tolerance level below which a bank closure is triggered the regulatory policy parameter we derive a model in which we make this parameter stochastic and bank specific to infer the stock market view of the regulatory capital forbearance value for 565 u s listed banks during 1990 to 2012 the countercyclical forbearance fraction in capital most substantial in recessions could represent 17 on average of the market valuation of bank equity and could go as high as 100

the robustness of output measures in property liability insurance efficiency studies abstract we empirically examine two methods for measuring output in property liability insurer efficiency studies the value added approach and the flow or financial intermediation approach the approaches are not mutually consistent the value added approach is closely related to traditional measures of firm performance but the flow approach is not in addition efficient value added approach firms are less likely to go insolvent while firms characterized as efficient by the flow approach are generally more likely to fail we also find that the theoretical concern regarding the value added approach s use of losses as a measure of output is not validated empirically

unobserved systematic risk factor and default prediction abstract we conduct a thorough analysis on the role played by the unobserved systematic risk factor in default prediction we find that this latent factor outweighs the observed systematic risk factors and can substantially improve the in sample predictive accuracy at the firm rating group and aggregate levels thus it might be helpful to include the unobserved systematic risk factor when simulating portfolio credit losses however we also find that this factor only marginally improves out of sample model performance therefore although the models we investigated all show reasonably good ability to rank order firms by default risk accurate prediction of default rate remains challenging even when the unobserved systematic risk factor is considered

modeling the loss distribution in this paper we focus on modeling and predicting the loss distribution for credit risky assets such as bonds and loans we model the probability of default and the recovery rate given default based on shared covariates we develop a new class of default models that explicitly accounts for sector specific and regime dependent unobservable heterogeneity in firm characteristics based on the analysis of a large default and recovery data set over the horizon 1980 2008 we document that the specification of the default model has a major impact on the predicted loss distribution whereas the specification of the recovery model is less important in particular we find evidence that industry factors and regime dynamics affect the performance of default models implying that the appropriate choice of default models for loss prediction will depend on the credit cycle and on portfolio characteristics finally we show that default probabilities and recovery rates predicted out of sample are negatively correlated and that the magnitude of the correlation varies with seniority class industry and credit cycle this paper was accepted by wei xiong finance

where modern macroeconomics went wrong this paper provides a critique of the dsge models that have come to dominate macroeconomics during the past quarter century it argues that at the heart of the failure were the wrong microfoundations which failed to incorporate key aspects of economic behaviour e g incorporating insights from information economics and behavioural economics inadequate modelling of the financial sector meant they were ill suited for predicting or responding to a financial crisis and a reliance on representative agent models meant they were ill suited for analysing either the role of distribution in fluctuations and crises or the consequences of fluctuations on inequality the paper proposes alternative benchmark models that may be more useful both in understanding deep downturns and responding to them

trade credit and the propagation of corporate failure an empirical analysis using an exhaustive data set on claims held by trade creditors suppliers on failed trade debtors customers we quantify the importance of trade credit chains for the propagation of corporate bankruptcy we show that trade creditors experience significant trade credit losses due to trade debtor failures and that creditors bankruptcy risks increase in the size of incurred losses by exploring the roles of financial constraints and creditor debtor dependences we infer that the trade credit failure propagation mechanism is driven by both credit losses and demand shrinkage finally we show that the documented propagation mechanism constitutes a significant part of the overall bankruptcy frequency suggesting that it has measurable implications for the aggregate level

the nonmonetary effects of financial factors during the interwar period i introduction in a monetary history of the united states friedman and schwartz 1963 attributed the enormous decline in real output and prices during the great depression of 1929 1933 to an unprecedented fall in the supply of money while there is much support today for the view that money played an important role in this episode many economists feel that this variable alone does not provide a sufficiently complete explanation of the link between the chaotic conditions in the u s financial sector and aggregate output and prices bernanke 1983 contended in an influential paper that financial shocks had important nonmonetary effects on aggregate economic activity in addition to their effects via the supply of money rather than consider the 1929 33 episode outside of its context bernanke widened his sample to include the entire interwar period which he defined as january 1919 december 1941 the major purpose of this paper is to present empirical evidence on the importance of the nonmonetary effects of financial factors in explaining fluctuations in real output and prices during the interwar period we define the interwar period as august 1922 june 1938 by omitting from our sample a few years immediately following world war i and immediately preceding world war ii we avoid the potential problems connected with war related government expenditures and autonomous gold flows discussed in joines 1985 our interwar period corresponds closely to the four peacetime cycles identified by firestone 1960 the theoretical literature on the nonmonetary effects of financial factors focuses on two related but distinct aspects 1 first studies by bernanke and blinder 1988 williamson 1987a 1987b bernanke and gertler 1987 and scheinkman and weiss 1986 demonstrate that the efficiency with which banks perform their intermediation function is an independently important determinant of the level of real economic activity second bernanke and gertler 1989 1990 gertler and hubbard 1988 and calomiris and hubbard 1990 focus on the effects of shocks to borrowers net worth positions on aggregate economic activity this approach suggests that exogenous shocks to borrowers net worth may be a source of economic fluctuations therefore for example to the extent that a deflation is unanticipated it is likely to erode borrowers net worth and thereby adversely affect aggregate economic activity beginning with fisher 1933 this deflation story has played an important role in studies such as bernanke 1983 hamilton 1987 and bernanke and james 1990 that attempt to explain the great depression in evaluating the effects of financial sector shocks during the great depression bernanke 1983 argued that in addition to the traditional monetary effects of adverse shocks to financial intermediation stressed by friedman and schwartz 1963 these shocks increased the cost of credit intermediation which in turn led to credit contraction rejection of otherwise profitable projects and subsequent falls in output to test this hypothesis bernanke included the deposits of failing banks and the liabilities of failing businesses as joint proxies for the cost of credit intermediation in a barro 1977 type output equation that also included unanticipated money both the deposits of failing banks and liabilities of failing businesses were found to be significant moreover dynamic simulations of the path of output for the period between mid 1930 and march 1933 accounted for substantially more of the actual decrease in output than was captured when only unanticipated money was included in the output equation in place of the joint proxies bernanke also used the yield differential between baa corporate and long term u s government bonds as a proxy for credit intermediation costs in all cases entry of the credit cost proxies significantly increased the percentage of the decline in output that was captured

the contingent valuation debate why economists should care t he contingent valuation method involves the use of sample surveys questionnaires to elicit the willingness of respondents to pay for generally hypothetical projects or programs the name of the method refers to the fact that the values revealed by respondents are contingent upon the constructed or simulated market presented in the survey a spirited and occasionally mean spirited battle over such methods is currently being waged involving competing factions within the federal government economists and lawyers representing business and environmental groups and interested academics as well at issue is a seemingly quite specific question should environmental regulations currently under development at both the department of the interior and the department of commerce sanction the use of the contingent valuation method in estimating the damage done by spills of oil chemicals or other substances covered by federal law more generally the debate raises broad questions about what economists have to say about the values that individuals place on public or private goods the two papers that follow this one make cases for and against the use of the contingent valuation method my aim here is to provide an overview of the technique and the debate surrounding it i also want to suggest why this debate should matter to economists both professionally and in their roles as citizens and consumers

the social discount rate what discount rate should be applied to social investments it is standard to use the market interest rate thereby respecting private preferences we show that application of this revealed preference criterion rests on faith not on logic it is justified only if preferences over all choices including past choices are time invariant the conditions for this to be true are stringent under more reasonable conditions policy makers should be more patient than private citizens whose choices define the most short sighted pareto optimum

altruism in cost benefit analysis it has recently been argued that altruistic motives for paying for a public sector project should be ignored in a cost benefit analysis the reason is that including altruism would mean a kind of double counting of the project s benefits this paper takes a look at these arguments and derives cost benefit rules which cover different kinds of altruism the paper also provides some recommendations for the treatment of altruism in studies using the contingent valuation method

changes in business cycles evidence and explanations this paper shows that the volatility of annual real macroeconomic indicators for the united states and the average severity of recessions have declined only slightly between the pre world war i and post world war ii eras recessions have however become somewhat less frequent and more uniform it argues that the advent of macroeconomic policy after world war ii can account for both the observed continuity and change countercyclical monetary policy and automatic stabilizers have prolonged postwar expansions and prevented severe depressions at the same time policy induced booms and recessions have led to continued volatility of the postwar economy

can equity volatility explain the global loan pricing puzzle we examine whether equity volatility can explain the difference in syndicated corporate loan spreads paid by u s and european borrowers first documented by carey and nini 2007 we argue that ols estimates of the association between equity volatility and loan spreads are biased and inconsistent we suggest instrumental variables that potentially identify consistent estimates our instrumental variable results indicate that there is no statistically significant difference in loan spreads paid by u s and european borrowers and that ols estimates of the association between idiosyncratic equity volatility and corporate loan spreads are biased downward by about a factor of 5

do analysts understand the economic and reporting complexities of derivatives we investigate whether and how the complexity of derivatives influences analysts earnings forecast properties using a difference in differences design we find that relative to a matched control sample of non users analysts earnings forecasts for new derivatives users are less accurate and more dispersed after derivatives initiation these results do not appear to be driven by the economic complexity of derivatives but rather the financial reporting of such economic complexity overall despite their financial expertise analysts routinely misjudge the earnings implications of firms derivatives activity however we find evidence that a series of derivatives accounting standards has helped analysts improve their forecasts over time

an empirical analysis of personal bankruptcy and delinquency this article uses a new dataset of credit card accounts to analyze credit card delinquency personal bankruptcy and the stability of credit risk models we estimate duration models for default and assess the relative importance of different variables in predicting default we investigate how the propensity to default has changed over time disentangling the two leading explanations for the recent increase in default rates a deterioration in the risk composition of borrowers versus an increase in borrowers willingness to default due to declines in default costs even after controlling for risk composition and economic fundamentals the propensity to default significantly increased between 1995 and 1997 standard default models missed an important time varying default factor consistent with a decline in default costs debt issued by consumers is an understudied asset class there has been particularly little academic study of recent trends in default on this debt between 1994 and 1997 the number of personal bankruptcy filings in the united states rose by about 75 the 1 35 million filings in 1997 represented well over 1 of u s households delinquency rates on credit cards rose almost as sharply federal reserve bank of cleveland 1998 the resulting losses to lenders amounted to a sizable fraction of the interest payments they collect potentially raising the average cost of credit these trends in default both in bankruptcy and delinquency are especially surprising in light of the strong economy over the period they provide an unusually rich source of variation to test the stability of models that forecast personal default and of credit risk models more generally there are two leading explanations for these trends first the risk composition of borrowers might have worsened under the risk effect less

the impact of diverse measures of default risk on uk stock returns a number of recent papers examine the relationship between default risk and equity returns and the results are mixed these studies employ different measures of default risk and we find that correlations between eight diverse measures of default risk tend to be less than 50 nonetheless we find that the relationship between stock returns and diverse measures of default risk tends to be consistent default risk is a significant determinant of stock returns and this relationship is hump backed as predicted by garlappi and yan 2011

forecasting the fragility of the banking and insurance sectors linkages between banks and insurance companies are important when forecasting the fragility of the banking and insurance sectors we propose a novel empirical framework that allows us to estimate unobserved linkages in panel data sets that contain observed regressors we find that taking unobserved common factors into account reduces the root mean square forecasts error of firm specific forecasts by up to 9 of system forecasts by up to 14 and by up to 39 for systemic forecasts of more distressed firms relative to a model based on observed variables only estimates of the factor loadings suggest that the correlation of financial institutions has been relatively stable over the forecast period

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

forecasting bankruptcy more accurately a simple hazard model i argue that hazard models are more appropriate than single period models for forecasting bankruptcy single period models are inconsistent while hazard models produce consistent estimates i describe a simple technique for estimating a discrete time hazard model i find that about half of the accounting ratios that have been used in previous models are not statistically significant moreover market size past stock returns and idiosyncratic returns variability are all strongly related to bankruptcy i propose a model that uses both accounting ratios and market driven variables to produce out of sample forecasts that are more accurate than those of alternative models copyright 2001 by university of chicago press

dynamic prediction of hedge fund survival in crisis prone financial markets abstract this study focuses on dynamic changes in survival probabilities over the lifetimes of hedge funds to model such probabilities a mixed cox proportional hazards cph model specifically a survival hazard model with time varying covariates and fixed covariates is employed resulting dynamic survival probabilities show that the mixed cph model provides significantly higher accuracy in predicting hedge fund failure than other models in the literature including fixed covariate cph models and discrete logit models our results are useful to investors and regulators of hedge funds in crisis prone financial markets

credit crises money and contractions an historical view abstract the relatively infrequent nature of major credit distress events makes an historical approach particularly useful using a combination of historical narrative and econometric techniques we identify major periods of credit distress from 1875 to 2007 examine the extent to which credit distress arises as part of the transmission of monetary policy and document the subsequent effect on output using turning points defined by the harding pagan algorithm we identify and compare the timing duration amplitude and co movement of cycles in money credit and output regressions show that financial distress events exacerbate business cycle downturns both in the 19th and 20th centuries and that a confluence of such events makes recessions even worse

a tale of two effects abstract this paper investigates the relationship between nominal interest rates and prices using nearly two centuries of data from ten industrial countries both a positive relationship between interest rates and price levels that is a positive gibson effect and a negative relationship between interest rates and subsequent price changes that is a negative fama fisher effect prevailed until world war i we propose a simple explanation wherein this doubly paradoxical juxtaposition of effects arises when money is supplied inelastically and prices are flexible this double paradox disappeared after world war ii when economies became mostly characterized by elastic money and sticky prices during that period a positive fama fisher effect emerged while the gibson effect largely dissipated

capital structure and financial flexibility expectations of future shocks abstract we test one of the main predictions of the financial flexibility paradigm that expectations about future firm specific investment shocks affect the firm s leverage we extract the expectations of small and large future shocks from the market prices of equity options we find that leverage decreases when expectations for any one of the two types of future shocks increase and the relation is statistically significant even when we control for standard determinants of leverage and the firm s probability of default expectations for future shocks explain a greater fraction of leverage variation than most standard determinants of leverage do and they affect more the small and financially constrained firms our results are not subject to an endogeneity bias and they confirm deangelo et al 2011 model s predictions and the evidence that managers seek for financial flexibility

political influence and declarations of bank insolvency in japan this paper investigates how politics affects bank supervision by examining determinants of bank failures in japan during 1999 2002 a period during which bank regulators were called upon to resolve insolvent banks in preparation for the lifting of a blanket deposit guarantee the empirical results suggest that japan s bank regulators had tendency to delay declarations of insolvency in prefectures that supported senior politicians of the ruling liberal democratic party ldp this result which is robust to a host of bank level and prefecture level controls suggests that bank supervision is prone to political influence that delays efficient resolution of insolvency

the effect of monetary policy on corporate bankruptcies evidence from the united states in this article we study the relationship between monetary policy and corporate bankruptcies in the usa the main hypothesis is that an increase in the monetary base or a decrease in the federal f

default prediction with dynamic sectoral and macroeconomic frailties abstract this paper extends the macroeconomic frailty model to include sectoral frailty factors that capture default correlations among firms in a similar business we estimate sectoral and macroeconomic frailty factors and their effects on default intensity using the data for japanese firms from 1992 to 2010 we find strong evidence for the presence of sectoral frailty factors even after accounting for the effects of observable covariates and macroeconomic frailty on default intensity the model with sectoral frailties performs better than that without results show that accounting for the sources of unobserved sectoral default risk covariations improves the accuracy of default probability estimation

political cost incentives for managing the property liability insurer loss reserve this paper examines the effect of rate regulation on the management of the property liability insurer loss reserve the political cost hypothesis predicts that managers make accounting choices to reduce wealth transfers resulting from the regulatory process managers may under state reserves to justify lower rates to regulators alternatively managers may have an incentive to report loss inflating discretionary reserves to reduce the cost of regulatory rate suppression we find insurers over state reserves in the presence of stringent rate regulation investigating the impact along the conditional reserve error distribution we discover that a majority of the response occurs from under reserving firms under reserving less because of stringent rate regulation

assessing the impact of nigeria s naira depreciation on output and inflation empirical evidence in support of the argument that keeping real exchange rate persistently devalued may lead to a permanent higher level of inflation have been provided kamin 1985 calvo et al 1994 however probably because of the relatively recent origin of serious exchange rate depreciation in sub saharan africa countries especially nigeria when compared with other regions e g latin america and asia not many studies have been reported on the subject the existing studies on effect of persistent exchange rate depreciation in nigeria are based on either regression or simulation approach rather than var approach this present study intends to fill these gaps by not only focusing the study on nigeria but also adopting restricted vector autoregressive model thereby providing basis for comparison with existing results obtained for other countries this abstract was borrowed from another version of this item

the value of private sector business credit information sharing the us case this paper investigates the value added by private information exchanges that share information on business payment performance we discuss how this information is collected and disseminated by the worlds largest private information broker dun bradstreet we provide the first empirical examination of the importance of this information at the lending decision level our findings indicate that exchange generated information provides significant explanatory power in failure prediction models controlling for other credit information that is easily available to lenders our study complements the work of jappelli and pagano information sharing lending and defaults cross country evidence centre for economic policy research discussion paper 2184 1999 who find in cross country macro level tests that information exchanges add value 2003 elsevier science b v all rights reserved

an aggregate measure for benefit cost analysis the kaldor hicks kh criterion has long been the standard for benefit cost analyses but it has also been widely criticized as ignoring equity and arguably moral sentiments in general we suggest the use of an aggregate measure khm instead of kh where m stands for moral sentiments khm simply adds to the traditional kh criterion the requirement that all goods for which there is a willingness to pay or accept count as economic goods this addition however runs up against objections to counting moral sentiments in general and non paternalistic altruism in particular we show these concerns are unwarranted and suggest that the khm criterion is superior to kh because it provides better information

term structures of credit spreads with incomplete accounting information we study the implications of imperfect information for term structures of credit spreads on corporate bonds we suppose that bond investors cannot observe the issuer s assets directly and receive instead only periodic and imperfect accounting reports for a setting in which the assets of the firm are a geometric brownian motion until informed equityholders optimally liquidate we derive the conditional distribution of the assets given accounting data and survivorship contrary to the perfect information case there exists a default arrival intensity process that intensity is calculated in terms of the conditional distribution of assets credit yield spreads are characterized in terms of accounting information generalizations are provided

common failings how corporate defaults are correlated we test the doubly stochastic assumption under which firms default times are correlated only as implied by the correlation of factors determining their default intensities using data on u s corporations from 1979 to 2004 this assumption is violated in the presence of contagion or frailty unobservable explanatory variables that are correlated across firms our tests do not depend on the time series properties of default intensities the data do not support the joint hypothesis of well specified default intensities and the doubly stochastic assumption we find some evidence of default clustering exceeding that implied by the doubly stochastic model with the given intensities why do corporate defaults cluster in time several explanations have been explored first firms may be exposed to common or correlated risk factors whose co movements cause correlated changes in conditional default probabilities second the event of default by one firm may be contagious in that one such event may directly induce other corporate failures as with the collapse of penn central railway in 1970 third learning from default may generate default correlation for example to the extent that the defaults of enron and worldcom revealed accounting irregularities that could be present in other firms they may have had a direct impact on the conditional default probabilities of other firms our primary objective is to examine whether cross firm default correlation that is associated with observable factors determining conditional default probabilities the first channel on its own is sufficient to account for the degree of time clustering in defaults that we find in the data

reassessing the impact of option introductions on market quality a less restrictive test for event date effects prior research concludes that option introductions improve the average liquidity of the underlying stocks we develop an improved generalizable test to assess whether market quality changes occur on or near an event date applying this method to option listing events we conclude that options do not systematically improve the market quality of the underlying security rather the market quality of the underlying security improves before the listing decision hazard model tests indicate that improving liquidity is a selection criterion in the option listing decision moreover these tests suggest that the size of a stock s bid ask spread is the single most important option listing determinant this study reexamines the impact of equity option introductions on stock market liquidity previous studies find an improvement in market quality charac teristics after option introductions and conclude that options improve the quality of the underlying market 1 in this paper we make several new contributions first we present and adopt a more flexible empirical tool for identifying regime shifts when event selection may be endogenously determined second using this method we reverse two major findings of the existing literature that option in troductions reduce spreads and increase volume finally we find that the bid ask spread is an important and perhaps the most important determinant of the option

impact of state exemption laws on small business bankruptcy decision 1 introductionsmall businesses are a primary source of employment in the u s economy employing over half of the private sector workforce small businesses are responsible for about two thirds of all net new jobs created according to the 2002 small business economic indicators sbei 1 over 99 7 of the 5 7 million firms in the united states are classified as small to medium sized businesses hence small businesses are a substantial contributor to economic growth in the united states small business owners enjoy more flexibility and freedom to capitalize on profitable opportunities than their larger business competitors hence they challenge the larger firms to be more efficient which is ultimately beneficial to consumers unfortunately small and medium sized businesses have a very low survival rate sbei 2002 in 2002 on the heels of the 2001 recession there were 550 100 small business births and 584 500 small business terminations both academics and public policy analysts have become increasingly concerned about the success of small businesses recently there has been a surge in small business research particularly surrounding small business credit supply and demand not surprisingly much of the literature has been focused on changes in lending technologies relationship2 versus scored3 information processing technologies soft versus hard 4 loan size considerations 5 and loan type considerations6 as they relate to small business supply and demand however very few have actually examined why small and medium sized businesses have very low survival rates some studies have analyzed the sensitivities of small business administration sba guaranteed loans to macroeconomic changes industry risks maturity structures 3 7 and 15 year maturities as well as lender and debt characteristics e g glennon and nigro 2001 2002 dunsky and pennington cross 2003 meanwhile agarwal chomsisengphet and liu 2003 empirically assessed the significant importance of owner and firm characteristics in determining the risk of small business default while controlling for the macroeconomic and industry risks with bankruptcy filings continuing to rise significantly in recent years many policy makers are turning their attention to bankruptcy laws specifically congress is considering reforming personal bankruptcy laws that if passed will significantly impact the demand for and supply of both consumer credit and small business funding white 2001 concludes that this bankruptcy reform could potentially reduce small business ownership but increase the supply of small business credit and in turn affect the growth of the u s economy small business owners have an incentive to file for personal bankruptcy when their indebtedness exceeds the value of their assets because both their personal and business debts can be discharged 7 though the bankruptcy exemption law is primarily designed for consumers the personal bankruptcy exemption law is a de facto bankruptcy procedure for small business owners because the debt of a noncorporate firm is the personal liability of the entrepreneur owner fan and white 2003 hence investigating the potential impact of the exemption law on small business bankruptcy decisions may provide some insight into how the bankruptcy laws should be reformed further fan and white 2003 argue that while the expected return to creditors should be lower in states with higher exemption level upon small business shutdown it is not entirely clear whether lenders will actually shut down a financially troubled small business while they empirically find that small businesses in high exemption states are more likely to be shut down this positive relationship is statistically insignificant the authors conclude that additional research will be needed to determine if a significant relationship exists p

is there a link between executive equity incentives and accounting fraud we compare executive equity incentives of firms accused of accounting fraud by the securities and exchange commission sec during the period 1996 2003 with two samples of firms not accused of fraud we measure equity incentives in a variety of ways and employ a battery of empirical tests we find no consistent evidence that executive equity incentives are associated with fraud these results stand in contrast to assertions by policy makers that incentives from stock based compensation and the resulting equity holdings increase the likelihood of accounting fraud

the role of time value in convertible bond call policy abstract since the seminal work of ingersoll 1977b the optimal time in which a firm should redeem its outstanding convertible bonds has received large attention by the financial literature several studies have put forward a number of possible costs and benefits for a firm if it interrupts the life of its convertible bonds prior to their contractual maturity however in this paper we argue that the managerial decision to call back a convertible bond is mainly driven by a fundamental variable almost neglected up until now the time value extraction from bondholders conversion option accordingly we propose a measure for the effective convenience of calling which we define as net time value advantage and we show using a survival analysis that it is more effective than previously proposed measures in explaining the firms observed call policy

recovery rates default probabilities and the credit cycle in recessions the number of defaulting firms rises on top of this the average amount recovered on the bonds of defaulting firms tends to decrease this paper proposes an econometric model in which this joint time variation in default rates and recovery rate distributions is driven by an unobserved markov chain which we interpret as the credit cycle this model is shown to fit better than models in which this joint time variation is driven by observed macroeconomic variables we use the model to quantitatively assess the importance of allowing for systematic time variation in recovery rates which is often ignored in risk management and pricing models

are risk benefit tradeoffs possible in siting hazardous facilities ever since alfred marshall introduced the notion of consumer s surplus into the literature as a measure of well being economists have been interested in determining the amount of compensation required to leave individuals indifferent between the status quo and a new situation where less of a commodity can be consumed for example due to an increase in prices the hicksian and kaldor hicks criteria of specifying compensation variations may be appropriate for normal market goods where there is a wellspecified demand curve the analysis is less applicable for dealing with environmental resources where elements of risk are involved or there exist public good features that make it difficult to estimate people s values for different amenities v kerry smith 1989 this paper investigates the question of the appropriate role that providing benefits to a host community possibly in the form of compensation can play in improving the chances of siting a facility that is perceived to be potentially hazardous in section i we develop a simple twoperiod expected utility model to explain preferences for benefit packages the empirical analysis examining the predictive power of this model will be related to the following problem of current interest the u s congress is attempting to locate a site for storing high level radioactive waste from commercial nuclear power plants in the united states an underground repository is to be constructed 2000 feet below the earth s surface for the purpose of permanently storing nuclear waste shipped in casks from power plants around the country once filled to capacity the repository would be sealed to minimize any radiation leakage based on the results of a telephone survey of residents of nevada regarding their attitudes toward a high level nuclear waste repository we suggest ways that the expected utility model might be modified to take into account behavioral factors that are not normally considered part of individual models of choice under uncertainty these factors may be useful in determining when compensation will be a useful tool in facilitating the siting process

too many to fail evidence of regulatory forbearance when the banking sector is weak this paper studies bank failures in 21 emerging market countries in the 1990s by using a competing risk hazard model for bank survival we show that a government is less likely to take over or close a failing bank if the banking system is weak this too many to fail effect is robust to controlling for macroeconomic factors financial crises the too big to fail effect domestic financial development and concerns due to systemic risk and information spillovers the paper also shows that the too many to fail effect is stronger for larger banks and when there is a large government budget deficit

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