bookbuilding and strategic allocation in the bookbuilding procedure an investment banker solicits bids for shares from institutional investors prior to pricing an equity issue the banker then prices the issue and allocates shares at his discretion to the investors we examine the books for 39 international equity issues we find that the investment banker awards more shares to bidders who provide information in their bids regular investors receive favorable allocations especially when the issue is heavily oversubscribed the investment banker also favors revised bids and domestic investors investment banks commonly build a book before pricing an equity issue in the united states it has been standard practice for a number of years in many other countries where fixed price offerings were traditionally used the bookbuilding procedure is becoming increasingly common especially for international equity issues 1 under the formal bookbuilding procedure the investment banker solicits indications of interest from institutional investors such indications consist of a bid for a quantity of shares and might include a maximum price i e a limit price or other details the investment banker uses the information to construct a demand curve the issue price is not set according to any explicit rule but rather based on the banker s interpretation of investors indications of interest he generally sets the price at a level at which demand exceeds supply and then allocates shares to the bidders at his discretion thus the

good ipos draw in bad inelastic banking capacity and hot markets we posit that screening ipos requires specialized labor which is in fixed supply a sudden increase in demand for ipo financing increases the compensation of ipo screening labor this results in reduced screening encouraging sub marginal firms to enter the ipo market further fueling the demand for screening labor the model s conclusions are consistent with empirical findings of increased underpricing during hot markets positive correlation between issue volume and underpricing and with tipping points between hot and cold markets finally the model makes sharp predictions relating the ipo market to fundamental values of firms and to investment banking returns

interest free loans between villagers abstract interest free loans are a common feature of low income rural economies in much of the economics literature lending at zero and positive interest are viewed as being highly segmented in the community with interest free loans an essential component of long term mutual consumption agreements between households an alternative interpretation is that zero interest loans are a credit contract that in lieu of interest includes an option allowing the lender to tax the borrower at a future date this option can take a variety of forms including the provision of labor or draft animal services or possibly a future loan in this paper we develop and test a model of household contract choice between zero and positive interest rate loans that builds on this alternative perspective it highlights the role of borrower and lender attributes and the economic environment in which they interact in determining contract choice enforcement considerations are secondary we use a unique household level data set

elite law firms in the ipo market abstract ipos with underwriters that retain an elite law firm exhibit a lower average first day return this empirical pattern remains after controlling for an extensive set of proxies associated with existing explanations of ipo initial returns we rationalize this finding with a pre ipo pricing model in which underwriters convey their lack of conflicts of interest to the issuer by engaging an elite law firm consistent with this selection channel and our model s predictions we find a lower incidence of elite law firm involvement and a larger difference in average first day return associated with elite law firms during the dot com period we document similar findings with respect to the dispersion of ipo first day returns and a pattern in the issuers re hiring decision of investment banks consistent with our theory

bad times good credit banks limited knowledge about borrowers creditworthiness constitutes an important friction in credit markets is this friction deeper in recessions thereby contributing to cyclical swings in credit or is the friction reduced as bad times reveal information about firm quality we test these alternative hypotheses using internal ratings data from a large swedish cross border bank and credit scores from a credit bureau the ability to classify corporate borrowers by credit quality is greater during bad times and worse during good times soft and hard information measures both display countercyclical patterns our results suggest that information frictions in corporate credit markets are intrinsically countercyclical and not due to cyclical variation in monitoring effort the presence of countercyclical information frictions provides a rationale for countercyclical provisions or capital in banks to smooth credit cycles

an essay on post keynesian theory a new paradigm in economics the impact of keynes s work in the 1930 s has been viewed by some economists as a revolution in economic thinking see lawrence r klein 56 1947 yet to those who were most closely associated with keynes at cambridge during that period the revolution proved largely abortive over the past 30 years many of keynes s critical insights into the workings of a modern technologically advanced economy seem to have been ignored with the result that there has been little fundamental change in the way economists perceive the world those one time associates of keynes joined by a small number of the younger generation at cambridge and elsewhere have consistently tried to highlight the incompatibility of keynes s views with orthodox theory even as they worked to develop more fully a generalization of the general theory see joan robinson 78 1952 this generalization may be said to represent in thomas kuhn s sense 62 1962 a new paradigm and since it extends the analysis set forth in keynes s treatise on money 1930 and the general theory it can be termed post keynesian few american economists seem aware of the major works that have contributed to the development of this new paradigm2 and fewer still even among those likely to be sympathetic seem to be aware of the

litigation risk and ipo underpricing abstract we examine the relation between risk and ipo underpricing and test two aspects of the litigation risk hypothesis 1 firms with higher litigation risk underprice their ipos by a greater amount as a form of insurance insurance effect and 2 higher underpricing lowers expected litigation costs deterrence effect to adjust for the endogeneity bias in previous studies we use a simultaneous equation framework evidence provides support for both aspects of the litigation risk hypothesis

reputation and hierarchy in dynamic models of employment the employment relationship with employees ability and their actions both private information thus combining adverse selection with moral hazard is modeled as a repeated game with self enforcing contracts being perfect bayesian nash equilibria under termination contracts the equilibrium contract structure consists of a hierarchy of ranks finite in number even though ability is continuous reputation acts as an effective device for worker discipline without the need for involuntary unemployment selection by bonding is not in general incentive compatible but selection by promotion of employees through the ranks is many other features correspond to observed employment structures

the informational content of initial public offerings the ability of capital markets to distinguish firms of different value by the size of their initial equity offerings is attenuated when insiders can sell equity more than once a model is developed in which there is price risk from holding equity between periods when the uncertainty is small there must be pooling in the first period when uncertainty is large the pooling equilibria dominate the separating equilibrium the size of an entrepreneur s initial public offering of equity can be informative this point was made in leland and pyle 1977 and stiglitz 1982 an entrepreneur with a good project can signal the value of the project by his or her willingness to retain equity an implicit assumption of this analysis is that the entrepreneur has only one opportunity to sell equity the assumption of a single sale is important since once the entrepreneur has signalled his or her project value by retaining equity investors should be willing to purchase the remaining equity however if entrepreneurs with bad projects foresee this they too may wish to retain equity initially and render themselves indistinguishable from entrepreneurs with good projects the current paper develops a model with two trading periods to capture the impact of having repeat sales of equity there is a public offering in the first period then the entrepreneur can make an open market sale in the second period however there is exogenous price risk which makes it costly for the entrepreneur to wait to sell in this context the value of the entrepreneur s project may not be revealed in the first period retaining equity is not very costly when uncertainty is small and there will only be pooling equilibria in this case in such a situation no information is revealed in the first period when the level of uncertainty is great there does exist a separating equilibrium however the pooling equilibria pareto dominate the separating equilibrium throughout the analysis the focus will be on paretooptimal equilibria the idea that an informed agent can profitably trade over time has been examined in related contexts kyle 1985 looked at the optimal trading strategy for an insider whose sequence of purchases is hidden in the aggregate order flow in equilibrium the insider s information is not completely incorporated into the market price until the close of trading

efficient estimation of structural hedonic systems when a product or job is not homogeneous but instead embodies several different characteristics it is difficult to use price information about the product to learn anything about the structure of the supply and demand for the embodied characteristics s rosen 1974 highlighted this problem and suggested that the estimated slope of the price characteristic relation the marginal price could be used instead of standard prices in otherwise standard estimation of the supply and demand system however recently brown and h rosen 1982 brown 1983 and mendelsohn 1985 have pointed out that this method is applicable only when the marginal price depends on variables not found in the supply and demand equations in this paper we show that since the hedonic system matches consumers with high demand for the characteristic to firms with low costs of producing it exogenous variables from the supply equation are not valid instruments in the demand equation and vice versa therefore even when the brown rosen mendelsohn brm condition holds estimation of the identified system by standard simultaneous equations techniques will produce inconsistent estimates we then show that the system can be identified despite the absence of the standard instruments and develop an efficient estimator for the identified system since cross equation constraints make estimation of hedonic systems particularly vulnerable to specification error we also consider some specification tests in this section we consider a simple model with only one characteristic the extension to several characteristics is straightforward the basic model developed by rosen can be described as follows firms with different technologies produce products which provide consumers with varying levels of some characteristic z each consumer buys one unit of the good the product is such that an amount of z from two units of the good provides less utility than the same amount of z embodied in a single unit e g acceleration in a car safety in a job consumers

originator performance cmbs structures and the risk of commercial mortgages this article examines information and incentive problems that can exist in the market for commercial mortgages that are pooled and repackaged as commercial mortgage backed securities cmbss we find that mortgages that are originated by institutions with large negative stock returns in the quarters prior to the origination date tend to have higher credit spreads and default more than other mortgages with similar observable characteristics properties financed with these mortgages also exhibit weaker post securitization operating performance in addition stock price loser institutions are anxious to securitize mortgages they originate more quickly finally we find that credit rating agencies require higher levels of subordination for cmbs pools i e view these pools as riskier that include more mortgages originated by underperforming originators this evidence is consistent with reputation models in which poorly performing originators have less incentive to carefully evaluate the credit quality of prospective borrowers thereby letting relatively riskier mortgages pass through their weaker screening standards the author 2010 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oxfordjournals org oxford university press

flight to quality in banking and economic activity abstract recent explanations of the transmission mechanism of monetary policy have emphasized that riskier lower net worth borrowers are more dependent on bank lending than larger less risky borrowers evidence from the federal reserve s survey on terms of bank lending indicates that the proportion of relatively high quality new loans safe moves countercyclically and granger causes gdp and inventory investment in the aftermath of a tightening of monetary policy the safe variable increases and in turn policy tends to relax once safe has risen

the international transmission of credit bubbles theory and policy we live in a new world economy characterized by nancial globalization and historically low interest rates this environment is conducive to countries experiencing credit bubbles that have large macroeconomic eects at home and are quickly propagated abroad in previous work we built on the theory of rational bubbles to develop a framework to think about the origins and domestic eects of these credit bubbles this paper extends that framework to include many countries and general preferences and uses it to study how nancial integration aects the properties of credit bubbles how the latter are transmitted across countries and the role of international policy coordination

managing credit bubbles we study a dynamic economy where credit is limited by insu cient collateral and as a result investment and output are too low in this environment changes in investor sentiment or market expectations can give rise to credit bubbles that is expansions in credit that are backed not by expectations of future pro ts i e fundamental collateral but instead by expectations of future credit i e bubbly collateral credit bubbles raise the availability of credit for entrepreneurs this

the estimation of demand parameters in hedonic price models this paper shows that the econometric problem of estimating hedonic demand parameters is not a standard identification problem caused by demand supply interaction as has been often assumed estimation procedures based on this assumption lead to biased results the hedonic estimation problem is instead caused by the endogeneity of both prices and quantities when households face a nonlinear budget constraint an instrumental variables solution to this problem is suggested using instruments that exogenously shift the budget constraint

incentives in principal agent relationships this article identifies some of the major issues that have been examined in the literature on incentives the article begins by discussing the frictions that lie at the heart of incentive problems next the principal s optimal response to these frictions is explored taking as given the characteristics of the agents with whom the principal interacts in a nonrepeated setting the design of individualized contracts contests and tournaments is analyzed then the principal s task of selecting the best agent is addressed and repeated agency relationships are considered

an equilibrium analysis of wage productivity gaps we develop a model in which each firm chooses a hiring standard as well as a wage schedule and an application fee we then characterize the set of nash equilibria and establish necessary and sufficient conditions for the existence of equilibrium if the distribution of productivities within each ability type is gaussian workers who pass the test will be paid more than the value of their marginal product while workers who fail the test will receive a wage net of the application fee below the value of their marginal product

lending terms and aggregate productivity abstract several empirical studies suggest that lending terms are eased in expansions and tightened in recessions thereby influencing the mix of financed entrepreneurs we study a model of adverse selection in competitive financial markets and show that lending terms deteriorate with the aggregate state under two general conditions if exogenous increments to entrepreneurs productivity raise returns to investment and or tighten the credit line needed to screen out a given entrepreneur type competition results in contracts with less screening two endogenous effects on productivity emerge production scales grow closer to optimal but lower productivity entrepreneurs enter the mix of producers the positive negative effect dominates at low high aggregate states

competition and increasing returns to scale a model of bank size this study examines the causal effects of bank size on banks survival asset quality and leverage two forces drive these effects increasing returns to scale derived from banks expertise and competition the first enables bigger banks to survive competition better have higher asset quality and be more leveraged it drives banks into a race for expansion this race toughens competition between banks which edges out small banks and may worsen all banks asset quality consequently the banking industry will be dominated by a small number of highly leveraged banks in this study financial intermediation arises endogenously and co exists with direct finance

bank competition and credit standards this article offers an explanation for the substantial variation of credit standards and price competition among banks over the business cycle as the economic outlook improves the average default probabilities of borrowers decline this affects the profitability of screening and causes bank screening intensity to display an inverse u shape as a function of economic prospects low screening activity in expansions creates intense price competition among lenders and loans are extended to lower quality borrowers as the economic outlook worsens price competition diminishes and credit standards tighten significantly deposit insurance may contribute to the countercyclical variation of credit standards copyright 2004 oxford university press

atheoretical macroeconometrics a critique abstract the spurious nature of the restrictions used to identify many macroeconometric models has led some researchers to advocate a style of econometric inquiry that is less dependent on prior theoretical restrictions of the sort that were central to the approach of the cowles commission this development which we call atheoretical macroeconometrics is summarized and evaluated in the current paper it is contrasted with an updated version of the cowles commission approach we conclude that while some of the exercises of atheoretical macroeconometrics are valid those that have attracted the most attention and appear the most innovative exogeneity testing impulse response analysis and policy analysis using estimated vector autoregressions are based on incorrect analysis

a theory of wage dynamics a dynamic equilibrium model of long term implicit labour contracts under incomplete but symmetric information is developed workers are assumed to be risk averse and of unknown ability or productivity risk neutral firms learn as do workers about each worker s productivity by observing the worker s output over time it is shown that equilibrium contracts provide for wages which never decline with age and increase only when the worker s market value increases above his current wage in addition to characterizing the equilibrium wage contract we also derive some of its implications for the behaviour of aggregate wages across various groups of workers these implications explain some findings in the recent empirical literature on ageearnings profiles in particular our model can explain why earnings may be positively related to experience even after controlling for productivity as some empirical studies have indicated

ratings quality over the business cycle credit rating agencies cras have long held that reputational concerns discipline their behavior the value of reputation however depends on economic fundamentals that vary over the business cycle in a model of ratings incorporating endogenous reputation and a market environment that varies we find that ratings quality is countercyclical specifically a cra is more likely to issue less accurate ratings when fee income is high competition in the labor market for analysts is tough and securities default probabilities are low persistence in economic conditions can diminish our results while mean reversion exacerbates them the presence of naive investors reduces overall quality but quality remains countercyclical finally we demonstrate that competition among cras yields similar results

optimal incentive contracts in the presence of career concerns theory and evidence this paper studies optimal incentive contracts when workers have career concerns concerns about the effects of current performance on future compensation we show that the optimal compensation contract optimizes total incentives the combination of the implicit incentives from career concerns and the explicit incentives from the compensation contract thus the explicit incentives from the optimal compensation contract should be strongest for workers close to retirement because career concerns are weakest for these workers we find empirical support for this prediction in the relation between chief executive compensation and stock market performance

covenants and collateral as incentives to monitor although monitoring borrowers is thought to be a major function of financial institutions the presence of other claimants reduces an institutional lender s incentives to do this thus loan contracts must be structured to enhance the lender s incentives to monitor covenants make a loan s effective maturity and the ability to collateralize makes a loan s effective priority contingent on monitoring by the lender thus both covenants and collateral can be motivated as contractual devices that increase a lender s incentive to monitor these results are consistent with a number of stylized facts about the use of covenants and collateral in institutional lending modern finance theory suggests that financial intermediaries such as commercial banks insurance companies and finance companies monitor and control their borrowers on behalf of other investors 1 this article investigates how the loans made by these institutions can be structured so as to best enhance the institutions role as delegated monitors covenants and collateral are common features of loans made by financial institutions but these features are somewhat difficult to justify consider loan covenants clauses in a loan contract that require the borrower to take or refrain from various actions berlin and mester 1992 magee and sridhar 1994 and park 1994 show that by giving institutions the right to renegotiate or call loans when covenants are violated covenants serve as tripwires that enhance the flexibility and efficiency of financial contracting also as documented in smith and warner 1979 control rights from covenants reduce borrower adverse selection or moral hazard nevertheless by allowing institutions to demand repayment based on any information contractible or not

endogenous matching and the empirical determinants of contract form empirical work on contracts typically regresses contract choice on observed principal and agent characteristics if i some of these characteristics are unobserved or partially observed and ii there are incentives whereby particular types of agents end up contracting with particular types of principals estimated coefficients on the observed characteristics may be misleading we address this endogenous matching problem using a data set on agricultural contracts between landlords and tenants in early renaissance tuscany controlling for endogenous matching has an impact on parameters of interest and tenants risk aversion appears to have influenced contract choice

signalling and the pricing of new issues this paper develops a signalling model with two signals two attributes and a continuum of signal levels and attribute types to explain new issue underpricing both the fraction of the new issue retained by the issuer and its offering price convey to investors the unobservable intrinsic value of the firm and the variance of its cash flows many of the model s comparative statics results are novel empirically testable and consistent with the existing empirical evidence on new issues in particular the degree of underpricing which can be inferred from observable variables is positively related to the firm s post issue share price

growth distribution and inflation a centennial synthesis microeconomics at harvard a little more than a decade ago having become disenchanted with neoclassical economics i suggested to my students that the very neoclassical course i had just taught provided one way of characterising the workings of a capitalist economy but hardly the only way after a year of utility maximisation partial and general equili brium pareto optimality and the associated agonies of lagrangians hessians jacobians and fixed point theorems my students were able to contain their enthusiasm for this news they had expected not one way of looking at the world but at the very least a magical key to knowledge and wisdom it is probably accurate to say that my message was not received at all i shall always remember the incomprehension etched on their faces the next year the last i was to teach theory in that incarnation i decided to present at least a sketch of an alternative to the neoclassical orthodoxy i soon discovered there were at least two foundations on which to build one going back to marx who died one hundred years ago the other deriving from keynes whose birth centenary we celebrate this year these two approaches it was clear were as different from each other as from the neoclassical approach the analysis of neo keynesian neo marxian and neoclassical theories has been a major focus of my research ever since and provides the framework for these lectures 1

capital requirements monetary policy and aggregate bank lending theory and empirical evidence capital requirements linked solely to credit risk are shown to increase equilibrium credit rationing and lower aggregate lending the model predicts that the bank s decision to lend will cause an abnormal runup in the borrower s stock price and that this reaction will be greater the more capital constrained the bank i provide empirical support for this prediction the model explains the recent inability of the federal reserve to stimulate bank lending by increasing the money supply i show that increasing the money supply can either raise or lower lending when capital requirements are linked only to credit risk the motivation of this article is first to examine the impact of risk based capital requirements namely those that link mandatory capital to asset ratios for banks to their loans on aggregate bank lending these requirements called the basle capital rules or bis guidelines went into effect in march 1989 for banks in the leading industrialized nations these rules initially required banks to maintain capital equal to 7 25 percent of business and most consumer loans with the requirement increasing to 8 percent by the end of 1992 secondly i wish to understand the link between monetary policy and aggregate bank credit in the presence of risk based capital requirements my curiosity is sparked in part by two recent phenomena one is the experience of the u s economy which displayed sluggish growth during 1989 93 despite a monetary policy that attempted to spur bank lending and economic activity and the other is the striking decline in loans relative to security holdings mostly government bonds in the asset portfolios of u s

the pricing of initial public offerings a dynamic model with information production this paper presents an information theoretic model of ipo pricing in which insiders sell stock in both the ipo and the secondary market have private information about their firm s prospects and outsiders may engage in costly information production about the firm high value firms knowing they are going to pool with low value firms induce outsiders to engage in information production by underpricing which compensates outsiders for the cost of producing information the information is reflected in the secondary market price of equity giving a higher expected stock price for high value firms

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

valuation adverse selection and market collapses we study a market for funding real investment where valuation meaning investors devoting resources to acquiring information about future payoffs creates an adverse selection problem unlike previous models more valuation is associated with lower market prices and so greater returns to valuation this strategic complementarity in the capacity to do valuation generates multiple equilibria with multiple equilibria the equilibrium without valuation is most efficient despite funding some unprofitable investments switches to valuation equilibria valuation runs look like credit crunches a large investor can ensure the efficient equilibrium only if it can precommit to a price and potentially only if subsidized

when arm s length is too far relationship banking over the credit cycle we conduct face to face interviews with bank ceos to classify 397 banks across 21 countries as either relationship or transaction lenders we then use the geographic coordinates of these banks branches and of 14 100 businesses to analyze how the lending techniques of banks in the vicinity of firms are related to credit constraints at two contrasting points of the credit cycle we find that while relationship lending is not associated with credit constraints during a credit boom it alleviates such constraints during a downturn this positive role of relationship lending is stronger for small and opaque firms and in regions with a more severe economic downturn moreover our evidence suggests thatrelationship lending mitigates the impact of a downturn on firm growth and does not constitute evergreening of loans

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

carrots and sticks pay supervision and turnover the efficiency wage model ewm has been advanced as an explanation for large and persistent wage differentials the shirking version of the ewm assumes a trade off between self supervision and external supervision the turnover version assumes turnover is costly to the firm variation across firms in the cost of monitoring shirking or turnover then is hypothesized to account for wage variations across firms for homogeneous workers using a new sample of firm data this paper presents empirical evidence of the trade off of wage premiums for supervisory intensity and turnover little evidence is found to support either version of the ewm

anxious periods and bank lending we examine the lending behavior of banks during anxious periods the main characteristic of anxious periods is that the perceptions and expectations about economic conditions worsen for economic agents even though the economy is not in a recession we identify distinct periods of anxiety for consumers ceos firms and analysts subsequently we study the lending behavior of us banks during the anxious quarters from 1985 to 2010 using bank level data the results show that banks lending falls when consumers and analysts are anxious and this effect is more pronounced when banks hold a higher level of credit risk these effects are more pronounced in anxious periods that were followed by recessions and in these periods loan growth also responds negatively to the anxiety of ceos yet these effects are quite less prevalent in the period after 2001

got rejected real effects of not getting a loan using a lender cutoff rule that generates plausibly exogenous variation in credit supply i investigate a new channel through which funding shocks are transmitted to the real economy based on a sample of more than 15 000 loan applications from small and medium sized enterprises i find that precautionary savings motives can aggravate real effects low liquidity firms whose loan applications were rejected increase cash holdings and cut noncash assets in excess of the requested loan amount these results point to the amplifying effect of precautionary savings motives in the transmission of credit supply shocks received december 11 2016 editorial decision february 22 2018 by editor philip strahan

extreme screening policies abstract we show that a lender often experiences increasing marginal returns to screening in a standard setting where the lender decides how intensively to screen the projects of prospective borrowers the increasing marginal returns imply that even small changes in industry parameters can produce large changes in equilibrium screening intensity in particular a small reduction in the expected return from borrowers projects can produce a pronounced increase in the screening of prospective borrowers with substantial corresponding welfare effects

too much investment a problem of asymmetric information this paper shows that under plausible assumptions the inability of lenders to discover all of the relevant characteristics of borrowers results in investment in excess of the socially efficient level raising the rate of interest above the free market level will restore optimality this conflicts with generally held views and is contrasted with the stiglitz weiss model it is shown that the assumptions which yield overinvestment support debt as the equilibrium method of finance however under the stiglitz weiss assumptions used to derive an underinvestment result equity is shown to be the equilibrium method of finance

anatomy of initial public offerings of common stock initial public offerings of common stocks ipos are typically underpriced in this paper the author develops and tests the hypothesis that underpricing serves as a form of insurance against legal liability and the associated damages to the reputations of investment bankers the empirical results based on samples of ipos that were brought to the market before and after the securities act of 1933 provide considerable support for the implicit insurance hypothesis specifically gross underpricing and market segmentation between prestigious and fringe investment bankers in originating unseasoned new issues appear to be peculiar to the post 1933 era a number of studies have documented that unseasoned common stocks typically garner large positive abnormal returns during a short period following the initial offering in his recent review of the empirical evidence on the initial returns of common stock offerings smith 36 concluded that the returns from offer price to after market price have exceeded fifteen percent his calculations did not include some of the earlier results obtained by mcdonald and fisher 23 and logue 20 when their samples are combined with those in smith s review the initial returns of unseasoned equity offerings appear even larger over seventeen percent these results imply that underwriters consistently offer the securities at substantial discounts from their values that are set in the after market in other words initial public offerings ipos appear to be underpriced what is even more puzzling is the fact that in some time periods underpricing appears to be systematically larger than in other periods ibbotson and jaffe 15 and ritter 29 have documented that during the postwar era there have been a number of periods in which the initial returns of common stocks have been extremely high ritter for example reported that the average return from the offer price to the first after market price was over forty eight percent for ipos in 1980 and 1981 1 similarly the initial returns of unseasoned issues of common stock brought to the market in 1950 1951 1961 and 1968 were unusually large these periods in which ipos were grossly underpriced are referred to as the hotissue markets why do investment bankers underprice ipos why do issuers

cash flows and credit cycles aggregate productivity falls in recessions and rises in expansions several empirical studies suggest that the systematic behavior of lending standards with laxer tighter standards applied during expansions recessions is responsible for reverting trends in aggregate productivity we build a dynamic model that rationalizes these findings adverse selection in credit markets emerges as a potential source of macroeconomic instability the key idea modeled is that in order to effectively signal their type to financiers productive entrepreneurs must suffer a cost the effective cost of signaling rises with higher cash flow brought about by stronger economic fundamentals because higher cash flow makes it easier for the unproductive type to mimic the productive type competition among the financiers then results in suboptimally lax lending standards low productivity entrepreneurs obtain financing the producer composition effect inducing a recession this in turn creates conditions weak economic fundamentals and low cash flow conducive to the emergence of tighter lending terms the strong composition effect leading to an economic recovery

the time and budget constraints of the firm this short paper surveys some recent research on the internal organization of firms with an emphasis on task allocation and synchronization it focuses on an organization facing no incentive problems but time constraints and costs of communication it highlights two motives for communication concern for delay and concern for throughput it also considers the interaction between the time and budget constraints of the firm and its implication for organization design

moral choice and the declining influence of traditional value orientations within the financial sector of a rapidly developing region of the people s republic of china this paper describes the results of a field experiment involving 400 employees from ten financial institutions operating within the shenzhen special economic zone of the people s republic of china it was found that when faced with an agency based problem employees indicated they would be less inclined to advise management of the existence of unethical work practices younger employees without supervisory experience displayed significant risk aversion traditional chinese values associated with confucian work dynamism were shown to be poor predictors of moral choice response a parsimonious regression model was developed that provides evidence that the universal trait masculinity femininity human heartedness acted to offset the negative influence of the agency problem on the other hand an operative s level of education attainment exerted a negative influence on moral response scores

deregulation and bank financial policy the standard view that banks can value maximize by exploiting non risk rated deposit insurance ignores the potential loss of a valuable bank charter due to insolvency recognition of this effect changes the bank s optimal financial policy and can induce extreme risk averting as well as risk taking behavior however as the value of the bank charter falls the risk taking strategy is more apt to dominate therefore current deregulation of the banking industry by easing entry and devaluing charters holds the potential for increases in the incidence of insolvency unless offsetting policies are instituted

credit booms and lending standards evidence from the subprime mortgage market this paper links the u s subprime mortgage crisis to demand side factors that contributed to the rapid expansion of the u s mortgage market we show that denial rates were relatively lower in areas that experienced faster credit demand growth and that lenders in these high growth areas attached less weight to applicants loan to income ratios the results are robust to controlling for supply side factors including house price appreciation mortgage securitization and other economic fundamentals and to several robustness tests controlling for endogeneity the results are consistent with the notion that a relaxation of lending standards triggered by an increased demand for loans contributed to the boom and the ensuing crisis together with other supply side explanations these findings shed new light on the relationship between credit booms and financial instability

preplay communication participation restrictions and efficiency in initial public offerings the extent to which the observed procedures for selling new issues are efficient is studied we show that a posted price mechanism in conjunction with nonbinding preplay communication and participation restrictions leads to an allocation of the security and payment that maximizes the seller s expected revenue given the informational constraints imposed by the optimizing incentives of the potential buyers article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

foreign bank lending evidence from the global financial crisis abstract we exploit highly disaggregated bank firm data to investigate the dynamics of foreign vs domestic credit supply in italy around the period of the lehman collapse which brought a sudden and unexpected deterioration of economic conditions and a sharp increase in credit risk taking advantage of the presence of multiple lending relationships to control for credit demand and risk at the individual firm level we show that foreign lenders restricted credit supply to the same firm more sharply than their domestic counterparts a number of exercises testing alternative explanations for this result suggest that such more intense restriction also reflects the functional distance between a foreign bank s headquarter and the italian credit market

signalling by underpricing in the ipo market abstract empirical evidence suggests the existence of hot issue markets for initial public offerings in certain periods and in certain industries new issues are underpriced and rationing occurs this paper develops a model consistent with this observation which assumes the firm itself best knows its prospects in certain circumstances firms with the most favorable prospects find it optimal to signal their type by underpricing their initial issue of shares and investors know that only the best can recoup the cost of this signal from subsequent issues

simultaneity in the market for housing characteristics abstract the nature of simultaneity in the markets for housing characteristics is examined simultaneity is found to arise in the implicit markets for individual characteristics because of the presence of nonlinearity in the market hedonic price function for housing however this simultaneity is not the kind discussed by s rosen j political econ 82 34 55 1974 between firm supplies and household demands as a result the rosen suggestion of identifying demand with firm supply shifters is inappropriate among the alternative approaches to identification the most desirable involve use of data over two or more markets in which residence for a given household is exogenous to the choice of housing

measuring multi product banks market power using the lerner index abstract the aggregate lerner index is a popular composite measure of multi product banks market power based on total assets as the single aggregate output factor we show that the aggregate lerner index only qualifies as a consistently aggregated lerner index if three conditions hold under these conditions the aggregate lerner index reduces to a weighted average of the product specific lerner indices we test the three conditions for a sample of u s banks covering the years 2011 2017 all three conditions are rejected and we show that they may cause an economically relevant bias to the aggregate lerner index depending on the economic context as a general solution we propose using the always consistently aggregated weighted average lerner index whenever a composite lerner index is needed

credit booms and macrofinancial stability this paper explores several questions about credit booms and busts when do credit booms occur when do they end up in busts and when do they not what are the implications for different policies if curbing credit growth and or mitigating the associated risks is an objective we find that credit booms are often associated with financial reform and economic growth they also tend to be more frequent in fixed exchange rate regimes only one in three credit boom episodes are followed by a financial crisis these booms tend to be larger and last longer macroprudential tools have at times proven effective in containing booms and more often in limiting the consequences of busts due to the buffers they helped to build

why don t issuers get upset about leaving money on the table in ipos one of the puzzles regarding initial public offerings ipos is that issuers rarely get upset about leaving substantial amounts of money on the table defined as the number of shares sold times the difference between the first day closing market price and the offer price the average ipo leaves 9 1 million on the table this number is approximately twice as large as the fees paid to investment bankers and represents a substantial indirect cost to the issuing firm we present a prospect theory model that focuses on the covariance of the money left on the table and wealth changes our reasoning also provides an explanation for a second puzzling pattern much more money is left on the table following recent market rises than after market falls this results in an explanation of hot issue markets we also offer a new explanation for why ipos are underpriced copyright 2002 oxford university press

profits investment and causality an examination of alternative paradigms determinants of the level of profits and the share of these profits in national income in the short run have received only limited attention from economists most paradigms such as the neo classical neo keynesian and neo marxian theories have in general attempted to explain distributive shares in long run equilibrium disequilibrium or steady state growth frameworks further there is little discussion of the behavioral relationships of various economic agents who affect and are affected by changes in distributive shares kalecki 19 argued for determination of profits and wages by the expenditure behavior of capitalists and by the distribution factors such as the degree of monopoly in output and input markets particularly the labor market 2 capitalists expenditure together with the distribution factors determine workers consumption and consequently national output and employment the national output will be pushed to the point where profits carved out of it in accordance with the distribution factors are equal to the sum of capitalists consumption and investment 19 81 further kalecki argued at length that given the distribution factors in the short run it is their capitalists consumption and investment that determine profits and not vice versa 19 79 similar behavioral roles of different economic classes are emphasized in the works of keynes 20 kaldor 18 and pasinetti 25 keynesians neo keynesians also ascribe a leading role to investment however there are differences in detail between the popular keynesian paradigm and that of keynes s own work 10 23 neo classical theory on the other hand seems to reverse this direction of causation between investment and profits due to the absence of an independent investment function

delayed payment contracts and a firm s propensity to hire older workers there are jobs for which firms employ older workers but tend not to hire new older workers this may be attributable in part to implicit contracts that discourage worker shirking and malfeasance by shifting compensation to the end of the contract such delayed payment contracts can introduce a form of fixed costs into the employment relationship much as with hiring and training costs these fixed costs lead firms to hire primarily young long term workers while firms employ older workers workers who are serving out the last years of their contract they tend not to hire them this paper presents empirical evidence that is consistent with this argument

a simple test of baron s model of ipo underpricing abstract this paper tests baron s 1982 model of initial public offering ipo underpricing that model relies on information asymmetries between issuers and underwriters and predicts that offer prices will be lower than would prevail in the absence of asymmetric information we examine the initial public offerings of 38 investment banks that went public in the period 1970 1987 and participated in the distribution of their own securities we find that contrary to the implication of baron s model such self marketed offerings are characterized by statistically significant underpricing comparable to that of other ipos

ownership agency and wages an examination of franchising in the fast food industry this paper estimates the difference in compensation between company owned and franchisee owned fast food restaurants the contrast is of interest because contractual arrangements give managers of company owned outlets less of an incentive to monitor and supervise employees estimates based on two data sets suggest that employee compensation is slightly greater at company owned outlets than at franchisee owned outlets the earnings gap is 9 percent for assistant and shift managers and 2 percent for full time crew workers furthermore the tenure earnings profile is steeper at company owned restaurants these findings suggest that monitoring difficulties influence the timing and generosity of compensation

a model of the demand for investment banking advising and distribution services for new issues this paper presents a theory of the demand for investment banking advising and distribution services for the case in which the investment banker is better informed about the capital market than is the issuer and the issuer cannot observe the distribution effort expended by the banker the optimal contract under which the offer price decision is delegated to the better informed banker in order to deal with the adverse selection and moral hazard problems resulting from the informational asymmetry and the observability problem is characterized the model demonstrates a positive demand for investment banking advising and distribution services and provides an explanation of the underpricing of new issues an investment banker performs three functions which may be of value to an issuer of new securities underwriting advising and distribution this paper presents a theory of the demand for investment banking advising and distribution services based on an informational asymmetry between an issuer of new securities and an investment banker ultimately a theory of the organization of the financial intermediary industry is required that would predict which firms would use which types of financial intermediaries for which purposes and which firms would raise capital without engaging the services of a financial intermediary only a limited set of such predictions are developed here in the context of a model of a fixedprice offering under a negotiated contract in which the investment banker is

option implied volatilities and the cost of issuing equity abstract the structure of a firm commitment seasoned equity offering seo resembles a put option underwritten by an investment bank syndicate smith 1977 employing implied volatilities from issuers stock options as a direct forward looking measure this paper examines the impact of expected price risk around seo issue dates on the direct cost of issuing equity using a comprehensive sample of 1208 seos between 1996 and 2009 we find issuers with higher option implied volatilities raise less external equity capital and pay higher investment bank fees in the stock market ceteris paribus the effect of implied volatility on the investment bank fees is stronger for larger issuers with lower pre seo abnormal realized stock volatilities and for seos with higher expected price pressures around issue dates these relationships are robust to adjustments for correlations among control variables sample selection bias and also simultaneous determination of offer size and seo fees

accounting standards and debt covenants has the balance sheet approach led to a decline in the use of balance sheet covenants abstract recent years have seen a sharp decline in the use of balance sheet based covenants in private debt contracts i hypothesize that changes in accounting standards can explain part of this decline standard setting has shifted towards a balance sheet approach which i predict has made the balance sheet less useful for contracting i measure the effect of the balance sheet approach on specific borrowers using a volatility ratio i find that borrowers with greater volatility ratios are less likely to have balance sheet based covenants this evidence is consistent with reductions in the contracting usefulness of the balance sheet being associated with reductions in balance sheet covenants

litigation risk intermediation and the underpricing of initial public offerings we formally examine the role of litigation risk in initial public offering ipo pricing the underwriter s pricing decision trades off current revenue against expected future litigation costs both of which are increasing in the ipo price given a time consistency constraint and rational expectations on the part of investors however the standard litigation risk argument does not lead to equilibrium underpricing we develop a richer model that provides sufficient conditions under which there is equilibrium underpricing the issuer s choice of employing an underwriter versus floating the ipo on its own is examined and various testable implications of the model are developed article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

why bank credit policies fluctuate a theory and some evidence in a rational profit maximizing world banks should msdntain a credit policy of lending if and only if borrowers have positive net present value projects why then are changes in credit policy seemingly correlated with changes in the condition of those demanding credit this paper argues that rational bank managers with short horizons will set credit policies that influence and are influenced by other banks and demand side conditions this leads to a theory of low frequency business cycles driven by bank credit policies evidence from the banking crisis in new england in the early 1990s is consistent with the assumptions and predictions of the theory

the costs of going public abstract this paper presents evidence regarding the two quantifiable components of the costs of going public direct expenses and underpricing together these costs average 21 22 of the realized market value of the securities issued for firm commitment offers and 31 87 for best efforts offers for a given size offer the direct expenses are of the same order of magnitude for both contract types but the underpricing is greater for best efforts offers an explanation of why some firms choose to use best efforts offers in spite of their apparent higher total costs is given

securitization under asymmetric information over the business cycle l auteur etudie l efficience de la titrisation comme moyen d intermediation financiere a l aide d un modele ou sont formalises des projets d investissement heterogenes et l asymetrie de l information sur la qualite des actifs titrises il montre qu en conservant une partie du risque l emetteur des actifs titrises signale de maniere credible leur qualite

credit incentives and reputation a hedonic analysis of contractual wage profiles a hedonic analysis of principal agent employment contracts is developed in which workers and employers exchange labor services and contractual payment patterns within this framework tests of alternative hypotheses are formulated and applied to contract data from a unique household level survey of economic activity in rural china in 1935 the results indicate that credit market constraints motivated workers and employers contract choices that shirking by workers rather than by employers was the dominant incentive issue that reputational concerns rather than threats of termination were the key worker disciplining device and finally that the contract s third party acted as an enforcement device rather than as a matchmaker subject to the availability of matched agent principal data this structural approach to modeling agency relationships can also be used in contemporary settings

hedonic prices and implicit markets estimating demand and supply functions for differentiated products in choosing the level of quality to purchase the buyer of a differentiated product also chooses a point on the marginal price schedule for that product hence in general the demand functions for product characteristics cannot be consistently estimated by ordinary least squares market equilibrium results in a matching of characteristics of demanders and suppliers this matching restricts the use of buyer and seller characteristics as instruments when estimating demand and supply functions for product characteristics the paper develops these issues a stochastic structure for hedonic equilibrium models is then proposed identification results are presented and estimation procedures are outlined

incomplete information high low bidding and public information in first price auctions high low bidding refers to auctions of a series of objects where for a subset of the auctioned objects one of two buyers bids high on some objects and low on others while the other buyer does the reverse this paper shows that high low bidding does not imply collusive behavior among buyers in particular through a formal modeling of a noncooperative game of information acquisition and bidding decisions it shows that high low bidding can be obtained the paper also demonstrates that if the cost of information to a seller is less than the equilibrium joint expected information cost of the buyers then it pays the seller to provide public information finally if the provision of public information is not feasible but a seller can know whether buyers have acquired information then it pays the seller to make known to the buyers and to pursue a policy that just prior to the start of an auction the seller will announce which buyer has acquired information