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

incentive compatible imbalance settlement imbalance settlement markets are managed by the system operators and provide a mechanism for settling the inevitable discrepancies between contractual agreements and physical delivery in european power markets settlements schemes are mainly based on heuristic penalties these arrangements have disadvantages first they do not provide transparency about the cost of the reserve capacity that the system operator may have obtained ahead of time nor about the cost of the balancing energy that is actually deployed second they can be gamed if market participants use the imbalance settlement as an opportunity for market arbitrage for example if market participants use balancing energy to avoid higher costs through regular trade on illiquid energy markets third current practice hinders the market based integration of renewable energy and the provision of financial incentives for demand response through rigid penalty rules in this paper we try to remedy these disadvantages by proposing an imbalance settlement procedure with an incentive compatible cost allocation scheme for reserve capacity and deployed energy incentive compatible means that market participants voluntarily and truthfully state their valuation of ancillary services we show that this approach guarantees revenue sufficiency for the system operator and provides financial incentives for balance responsible parties to keep imbalances close to zero

marginal pricing and supplement cost allocation in transmission open access the application of marginal costing to transmission pricing in open access schemes requires the collection of a supplement to finance the transmission systems the paper describes the application of marginal cost based pricing in the chilean power system and the difficulties faced in allocating the supplement among parties involved alternative methods for defining the allocation are formulated generalized generation and load distribution factors for cost allocation are formulated and implemented the methods are applied to allocate payments for transmission services provided by the transmission network and by a distribution company

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

cost benefit reflective distribution charging methodology this paper describes the principle and implementation of a new mw mvar miles charging methodology which was developed to reflect three key cost drivers in distribution network development the distance used to support nodal real and reactive power injection withdrawal the degree of support offered by the network assets and the operating condition of the supporting assets in terms of their power factors the inclusion of the latter driver allows the developed charging methodology to reward network users who are contributing to better power factors and better network utilization while penalizing customers who worsen power factors and network utilization as a consequence the charging model is able to provide forward looking incentives for network customers to behave in a manner to better the network condition which will in turn help to reduce the cost of future network development in addition the separation of real and reactive power pricing would give network users clear indications of the cost of their reactive power draw from the network which in turn could help them to evaluate the economics in investing in reactive power compensation devices the proposed charging methodology is demonstrated on a practical eight busbar distribution system with a mixed demand and embedded generation eg this paper results from work undertaken in a project on distribution charging methodologies for western power distribution the views in this paper expressed are not those of western power distribution

marginal loss pricing for hours with transmission congestion nodal electricity prices are designed to send efficient economic signals to market participants for operating and investment decisions the inherent nonlinearity of transmission losses and the use of marginal loss pricing can obscure the intended economic information in the loss component of nodal prices as one step in clarifying the determination of the marginal loss price component this paper discusses the calculation of nodal electricity prices in lossy networks and presents a variety of accepted methods for determining marginal loss this paper then proposes a method for calculating the marginal loss component of nodal prices during hours with congestion that reflects each market participant s contribution to marginal losses more accurately than current implementations the proposed method recognizes that increases in incremental energy flows cannot flow across constrained lines and thus system wide marginal losses should not be attributed to generators or loads in the constrained subregions the objectives of the discussion are to improve the understanding of how marginal losses are determined and also to improve the accuracy of the information conveyed in the marginal loss price component the ultimate goal is to promote more efficient price signals to electricity market participants for both transmission loss and congestion

optimal dispatch under transmission contracts open transmission access is now the most topical issue in power system deregulation power system operation poses the greatest challenge to a competitive environment incorporating open transmission access and there are some fundamental operational problems that are still unresolved this paper seeks to provide an approach to the power dispatch problem in a structure dominated by bilateral and multilateral transmission contracts a framework for price based operation under these conditions is developed and a methodology for optimal transmission dispatch is proposed the case study results illustrate that the proposed market arrangement and operating mechanisms are compatible with this new business environment

unbundling of transmission and ancillary services ii cost based pricing framework for pt i see ibid vol 12 no 2 1997 this paper presents a systematic framework for pricing transmission and ancillary services in competitive power markets this framework is based on the recovery of fixed and operating costs and it meets the traditional revenue requirements it is practical feasible easy to implement and to regulate it can be implemented with minimum transition cost this network flow dependent and nondiscriminatory framework is based on the decomposition approach presented in part i of this paper this decomposition forms an essential part of the proposed framework for usage based recovery of the fixed and operating costs the transmission system related fixed cost component is recovered from all transactions based on percentage utilization of the transmission system equipment the charge is based on the actual network power flows the ancillary service charge for a given transaction can be computed as the sum of the costs incurred at secondary generation for compensating the imbalance caused by that specific transaction the path providing function of the transmission grid is viewed as a true monopolistic service its pricing is cost based and charge for its use is usage based the generation based ancillary service supply can be made competitive its pricing is market based and charge for it is usage based a global overview of the proposed pricing strategy is analyzed in the context of other alternatives especially cost based methods a numerical example on a five bus system is given to illustrate the use of this pricing strategy

modeling usage of medical care services the medical expenditure panel survey data 1996 2000 we explore the determinants of usage of six different types of health care services using the medical expenditure panel survey meps data years 1996 2000 we apply a number of models for univariate count data including semiparametric semi nonparametric and finite mixture models we find that the complexity of the model that is required to fit the data well depends upon the way in which the data is pooled across sexes and over time and upon the characteristics of the usage measure pooling across time and sexes is almost always favoured but when more heterogeneous data is pooled it is often the case that a more complex statistical model is required

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

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

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

simultaneous service allocation by average sensitivity method ancillary services and other interconnected services are important especially in a competitive operation environment since these services are costs related they should be allocated in order to send the correct price signal to market participants an average sensitivity method is proposed for allocating services to simultaneous transactions it can provide results close to power flow based methods while requiring as little computational time as traditional sensitivity based approaches except for rare cases it satisfies the requirement of allocation quantity allocation ratio and application feasibility test results indicate that the average sensitivity method is a successful allocation algorithm

the relationship between hospital mortality rates and hospital market and patient characteristics this study analyses the relationship between hospital outcome specifically mortality rates and various hospital and market characteristics the data are for all general acute care hospitals in california in 1991 that had at least 50 medicare cases selected by the health care financing administration hcfa for their computation of 1991 observed and predicted mortality rates the dependent variable was constructed from these mortality rates hospital and market characteristics were obtained from california s office of statewide health planning and development 1991 tapes the american hospital association s annual 1991 report 1990 census data and hcfa s 1991 medicare hospital mortality information report highly significant results p 0 01 were found for three of the predictor variables improved mortality rates were associated with a lower proportion of medicaid patients with a larger market and with a higher prior year profit margin other factors that contributed to improved mortality rates p

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

long run incremental cost pricing based on unused capacity this paper proposes a novel approach for providing long run incremental cost lric pricing in network charges the proposed approach makes use of the unused capacity of an exiting network to reflect the cost of advancing or deferring future investment consequent upon the addition of generation or load at each study node on a distribution network compared with existing approaches to lric pricing the proposed approach produces forward looking charges that reflect both the extent of the network needed to service the generation or load and the degree to which that network is utilized the efficacy of the proposed lric approach has been validated by a comparison with the established investment cost related pricing icrp method used for deriving transmission charges in great brain gb this paper draws on work undertaken in projects for western power distribution and ofgem office of gas and electricity markets u k however the views expressed in this paper are those of the authors

transmission loss allocation a comparison of different practical algorithms a pool operated electricity market based on hourly auctions usually neglects network constraints and network losses while applying its market clearing mechanism this mechanism determines the accepted and nonaccepted energy bids as well as the hourly market clearing prices as a result ex post procedures are needed to resolve network congestions and to allocate transmission losses to generators and demands this paper focuses on transmission loss allocation procedures and provides a detailed comparison of four alternative algorithms 1 pro rata pr 2 marginal allocation 3 unsubsidized marginal allocation and 4 proportional sharing a case study based on the ieee rts is provided different load scenarios covering a whole year are analyzed finally conclusions and recommendations are stated

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

performance pricing in bank debt contracts abstract performance pricing links bank debt interest rate spreads to a borrower s performance via two options interest decreasing performance pricing reduces spreads if credit quality improves it is more common when prepayment is more likely or costly and when adverse selection costs are higher and is less common when multiple performance measures better predict credit quality interest increasing performance pricing increases spreads if credit quality deteriorates it is more common when lenders reduce interest rates to add this provision when downgrades are more likely and when moral hazard costs are higher we find lower spreads for contracts with interest increasing performance pricing

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

competition and bias we attempt to measure the effect of competition on bias in the context of analyst earnings forecasts which are known to be excessively optimistic because of conflicts of interest our natural experiment for competition is mergers of brokerage houses which result in the firing of analysts because of redundancy e g one of the two oil stock analysts is let go and other reasons such as culture clash we use this decrease in analyst coverage for stocks covered by both merging houses before the merger the treatment sample to measure the causal effect of competition on bias we find that the treatment sample simultaneously experiences a decrease in analyst coverage and an increase in optimism bias the year after the merger relative to a control group of stocks consistent with competition reducing bias the implied economic effect from our natural experiment is significantly larger than estimates from ols regressions that do not correct for the endogeneity of coverage this effect is much more significant for stocks with little initial analyst coverage or competition

financial distress stock returns and the 1978 bankruptcy reform act we study distress risk premia around a bankruptcy reform that shifts bargaining power in financial distress from debtholders to shareholders we find that the reform reduces risk factor loadings and returns of distressed stocks the reform effect is stronger for firms with lower firm level shareholder bargaining power an increase in credit spreads of riskier relative to safer firms in particular for firms with lower firm level shareholder bargaining power confirms a shift in bargaining power from bondholders to shareholders out of sample tests reveal that a reversal of the reform s effect leads to a reversal of factor loadings and returns

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

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

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

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

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

reliability differentiated real time pricing of electricity optimal resource planning and power dispatch models from a societal welfare point of view imply an optimal pricing policy which is referred to here as reliability differentiated real time pricing or in short reliability differentiated pricing this pricing scheme combines real time pricing and priority pricing with reliability differentiation based on consumer outage costs this pricing policy is analyzed the model used in the analysis is developed with particular emphasis on consumer behavior and welfare effects the implications of the model for the pricing of spinning reserve and firm capacity as well as for revenue reconciliation are examined it is concluded that such a pricing scheme will in general result in greater attainable welfare than either the real time pricing or priority pricing paradigms moreover it results in the maximum attainable welfare for the system with revenue reconciliation and provides an optimal pricing scheme for spinning revenue and firm capacity

optimal priority structure capital structure and investment we study the interaction between financing and investment decisions in a dynamic model where the firm has multiple debt issues and equityholders choose the timing of investment jointly optimal capital and priority structures can virtually eliminate investment distortions because debt priority serves as a dynamically optimal contract examining the relative efficiency of priority rules observed in practice we develop several predictions about how firms adjust their priority structure in response to changes in leverage credit conditions and firm fundamentals notably financially unconstrained firms with few growth opportunities prefer senior debt while financially constrained firms with or without growth opportunities prefer junior debt moreover lower rated firms are predicted to spread priority across debt classes finally our analysis has a number of important implications for empirical capital structure research including the relations between market leverage book leverage and credit spreads and tobin s q the influence of firm fundamentals on the agency cost of debt and the conservative debt policy puzzle the author 2011 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

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

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

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

cost of wheeling methodologies the cost of wheeling and the methodology by which it is computed is a high priority problem throughout the power industry due to the growth in transmission facilities the cost differentials between utility companies and the dramatic growth in nonutility generation capacity this paper contains descriptions and summaries of computational procedures and data requirements of four embedded cost methodologies two long run incremental cost methods and the short run marginal cost method four methodologies are also presented for allocating the wheeling costs among a number of wheels when simultaneously present on a company s system as required for the standard long run incremental cost method

reliability based distribution network pricing as a tool for network operators to recover network investment costs from network users as well as to provide forward looking economic signals distribution network pricing models are also expected to identify and recover investment costs related to maintaining network security the existing models reflect network security by determining the maximum allowed contingency flow along each component through implementing deterministic contingency analysis they fail to consider two reliability cost drivers 1 reliability levels of network components and 2 interruption tolerance levels at different nodes for the first time this paper proposes a novel distribution network pricing model to reflect two key reliability cost drivers 1 the nodal unreliability tolerance mandated by security standards which is linked to the customer size at the node and 2 the stochastic nature of component reliability that reflects differing failure rates of network components by combining the two factors the new reliability based pricing model is able to recognize the impact on network investment from network components reliability in addition to their distance and the degree of utilization the concept is firstly demonstrated on three small networks a single circuit system a parallel circuit system and a meshed system the applicability of the new pricing approach to practical systems is then illustrated on a practical distribution network in the u k system

decomposition model and interior point methods for optimal spot pricing of electricity in deregulation environments in this paper an integrated optimal spot pricing model is presented first the proposed model includes the detailed derivation of optimal nodal specific real time prices for active and reactive powers and the method to decompose them into different components corresponding to generation loss and many selected ancillary services such as spinning reserve voltage control and security control the features of the proposed model are discussed in relationship to existing pricing models and classical economic dispatch the model is then implemented by modifying existing newton opf methods through interior point algorithms which can effectively avoid go no go gauge i e highly volatile in the calculation of spot prices case studies on 5 bus and ieee 30 bus systems are reported to illustrate the proposed method

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

debt valuation renegotiation and optimal dividend policy the valuation of debt and equity reorganization boundaries and firm s optimal dividend policies are studied in a framework where we model strategic interactions between debt holders and equity holders in a game theoretic setting which can accommodate varying bargaining powers to the two claimants two formulations of reorganization are presented debt equity swaps and strategic debt service resulting from negotiated debt service reductions we study the effects of bond covenants on payout policies and distinguish liquidity induced defaults from strategic defaults we derive optimal equity issuance and payout policies the debt capacity of the firm and the optimal capital structure are characterized

framework for assessing the economic efficiencies of long run network pricing models this paper presents a framework for assessing the economic efficiency of different long run network pricing models the aim is to provide a quantifiable efficiency measure that will inform regulators network operators and network users when an alternative pricing model is contemplated the efficiency measure is derived from the long term network development costs that flow from a dynamic interaction between network pricing and planning that is the response of network users to differing charging models the consequential network investment and new financial incentives that follow reinforcement of the network to illustrate the approach the framework has been used to assess the relative efficiency of three broad class of distribution pricing models in a study undertaken for the great britain gb s regulator for gas and electricity markets in england wales and scotland ofgem the study contemplated three pricing models that are used in practice the efficiency assessment in the ofgem study was conducted on a pseudo distribution reference network on the assumption that the results from the reference network could be scaled up to the national level then the assessment suggests that by moving from the present drm model to the more economic lric approach gb distribution network operators could save in the region of pound200 m over the next 20 years in their network investment costs this paper draws heavily on the project undertaken for ofgem but any views expressed are solely those of the authors

has the caveat of case mix based payment influenced the quality of inpatient hospital care in portugal portugal was the first country with a national health system to incorporate diagnosis related group drg case mix adjustment in formulating hospital budgets on a nation wide basis most of the case mix payment outcomes literature comes from the usa where the quality of data is superior to that of many other countries the purpose of this article is to assess the initial impact of case mix financing on the quality of inpatient care in portuguese hospitals using a methodology that may be appropriate for health care systems whose information is not as complete as that of the usa estimating a count data model at the hospital level with inpatient mortality as a quality indicator the authors find no evidence that case mix based payment has had adverse consequences on inpatient mortality for the most frequent non obstetric drg during the three year time period under study

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

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

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

the economic dispatch with consideration of transmission service charge for a generation company summary form only given as follows this paper presents a novel economic dispatch strategy for a generation company which owns several units with different fuel costs efficiency and locations and has a bilateral contract with several large customers the proposed strategy not only considers the generation cost but also takes into account the wheeling charge for the use of the transmission system a modified megawatt mile method is proposed to calculate the wheeling cost in this paper finally the calculation result of economic dispatch for a generation company with two units and their loads in a real power system is demonstrated

nondiscrinilnatory system losses dispatching policy in a bilateral transaction based market in this paper a new method to allocate transmission losses for simultaneous bilateral transactions is proposed the methodology uses a circuit approach of the system in conjunction with a classical power flow for a given operating point it is possible to derive system loss expression as a sum of partial terms due to each transaction these transaction loss components supplied by slack buses can turn into costs associated with the respective transactions alternatively in this paper it is proposed that each transaction provides for its own loss thus eliminating the need for a balancing mechanism in this case the developed methodology evaluates the increase of active power at each transaction generator through loss contributions not arbitrarily assumed but calculated from a developed loss allocation formula the main advantage of the developed method lies in its simplicity and capability of treating multiple transactions simultaneously

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

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

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

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

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

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

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

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

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