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

collateral heterogeneity in risk attitude and the credit market equilibrium abstract this paper examines the argument that the availability of collateral rules out credit rationing a model of the credit market with ex ante asymmetric information and heterogeneous entrepreneurs attitudes toward risk is set up it is shown that due to the interplay between project choice and entrepreneurs preferences using collateral as a signal to screen safer projects may prove impossible instead a partially separating two contract equilibrium with rationing at one contract emerges contrary to previous theoretical research and consistently with conventional wisdom and systematic evidence the use of collateral is never negatively correlated with project risk

inefficient credit booms this paper studies the welfare properties of competitive equilibria in an economy with financial frictions hit by aggregate shocks in particular it shows that competitive financial contracts can result in excessive borrowing ex ante and excessive volatility ex post even though from a first best perspective the equilibrium always displays under borrowing from a second best point of view excessive borrowing can arise the inefficiency is due to the combination of limited commitment in financial contracts and the fact that asset prices are determined in a spot market this generates a pecuniary externality that is not internalized in private contracts the model provides a framework to evaluate preventive policies which can be used during a credit boom to reduce the expected costs of a financial crisis copyright 2008 wiley blackwell

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

bank capital borrower power and loan rates we examine how bank capital and borrower bargaining power affect loan spreads consistent with previous studies higher bank capital has a negative impact on loan rates but borrower cash flow has a significant effect on this impact compared with high capital banks low capital banks charge more for borrowers with low cash flow but offer greater marginal discounts as these borrowers cash flow rises these effects are largely focused on more bank dependent borrowers we find some evidence that low capital banks charge a higher premium for bank dependent borrowers systematic risk but not for their total equity risk or default risk received january 27 2015 editorial decision july 7 2018 by editor philip strahan authors have furnished an internet appendix which is available on the oxford university press web site next to the link to the final published paper online

family income and child health in the uk recent studies examining the relationship between family income and child health in the uk have produced mixed findings we re examine the income gradient in child general health and its evolution with child age in this country using a very large sample of british children we find that there is no correlation between income and child general health at ages 0 1 that the gradient emerges around age 2 and is constant from age 2 to age 17 in addition we show that the gradient remains large and significant when we reduce the endogeneity of income furthermore our results indicate that the gradient in general health reflects a greater prevalence of chronic conditions among low income children and a greater severity of these conditions taken together these findings suggest that income does matter for child health in the uk and may play a role in the intergenerational transmission of socioeconomic status

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

the causal effect of family income on child health in the uk recent studies examining the effect of family income on child health have been unable to account for the endogeneity of income using data from a british cohort study we address this gap by exploiting exogenous variation in local labour market characteristics to instrument for family income we estimate the causal effect of family income on different measures of child health and explore the role of potential transmission mechanisms we find that income has a very small but significant causal effect on subjective child health and no significant effect on chronic health conditions apart from respiratory illnesses using the panel structure we show that the timing of income does not matter for young children moreover our results provide further evidence that parental health does not drive a spurious relationship between family income and child health our study implies that financial transfers are unlikely to deliver substantial improvements in child health

limited liability and incentive contracting with ex ante action choices abstract this article examines a principal agent model of financial contracting in which a risk neutral entrepreneur agent makes an unobservable ex ante effort choice while employing the investment funds of a risk neutral investor principal the key innovation is that the investment contract is subject to statutory liability limits given these liability limits two settings are considered one in which the investor payoff function is also constrained to be monotonically nondecreasing in firm profit and another in which no such monotonic contract constraint is imposed in the former case a standard debt contract is shown to emerge and a first best effort choice is not achieved in the latter setting the optimum is characterized by a live or die payoff function and a first best effort level may or may not be realized

special purpose entities and bank loan contracting abstract in this study we show that a firm s use of special purpose entities spes is associated with unfavorable loan contract terms including higher loan rates collateral requirements and restrictive covenants further analyses suggest that the association between the use of spes and unfavorable loan contract terms is primarily due to the increase in the information risk faced by lenders as firm managers can easily use spes to manipulate earnings and hide losses specifically we find that the use of spes has a more pronounced effect on increasing the cost of loans and causing more stringent non price loan terms when managers have a stronger incentive to manipulate earnings and when banks have less knowledge about the spe sponsor firms due to the lack of prior lending relationship in addition we find that the use of spes is associated with a greater likelihood of accounting restatements and greater information asymmetry between inside managers and outside capital suppliers

an economic approach to the study of the relationship between housing hazards and health the case of residential fuel poverty in france abstract the impact of housing hazards on health outcomes is becoming a major issue especially given the recent and on going reviews of energy legislation in many european countries a large body of epidemiological literature argues that fuel poverty a frequently debated example of a housing hazard involving low indoor temperatures is associated with heightened health risks by using a large scale nationally representative dataset i seek in this article to delve into this alleged association and uncover a causal relationship between fuel poverty and self assessed health coming from an economics standpoint i used a panel approach based on an instrumental fixed effects model which allow me to analyse causality i used both objective and subjective fuel poverty indicators the results show that there is a significant causal relationship between fuel poverty and self assessed health status the estimated causality is exacerbated when subjective fuel poverty indicators are used the results also show that the negative impact of fuel poverty on health is deferred meaning that fuel poverty takes time to manifest itself in terms of poor health in policy terms this study adds to the debate on investing in housing energy efficiency schemes to reduce fuel poverty and thereby improve health outcomes it also lends support to the argument according to which improving housing conditions to curb fuel poverty is a lever for reducing pubic expenditures on health care

competitive equilibrium in the credit market under asymmetric information abstract we study a competitive credit market equilibrium in which all agents are risk neutral and lenders a priori unaware of borrowers default probabilities admissible credit contracts are characterized by the credit granting probability the loan quantity the loan interest rate and the collateral required the principal result is that in equilibrium lower risk borrowers pay higher interest rates than higher risk borrowers moreover the lower risk borrowers get more credit in equilibrium than they would with full information no credit is rationed and collateral requirements are higher for the lower risk borrowers

the price concentration relationship in banking the commonly observed positive correlation between market concentration and profitability may be explained by noncompetitive pricing behavior as argued by the structure performance hypothesis or by the greater efficiency of firms with dominant market shares as argued by the efficient structure hypothesis by examining the price concentration relationship instead of the profit concentration relationship this paper tests the structure performance hypothesis in a manner that excludes the efficient structure hypothesis as an alternative explanation of the results the results strongly support the structure performance hypothesis and are robust with respect to model specification measurement of concentration and econometric technique copyright 1989 by mit press

the impact of parental income on early schooling transitions a re examination using data over three generations abstract this paper applies new semi parametric techniques to estimate the effects of parental income on the probability of being held back in elementary school in france we use information on grandparents past socioeconomic status and parents education level to separate the parental income effects from the effects of the unmeasured determinants of children s performance at school that are correlated with parental income when considering the probability of being held back in elementary school we find that the effects of parental poverty are much larger than the effects of a child s sex or age age within his her class or of the parents education level our findings suggest that policy decisions that increase income transfers to relatively poor families have a potentially very large impact on children s early performance at school

deposit insurance reform what are the issues and what needs to be fixed abstract the current problems in the commercial banking industry have led to widespread calls for reform of the deposit insurance contract on the grounds that it promotes moral hazard we review the empirical evidence for the significance of moral hazard as an important cause of the present crisis we then evaluate various reform proposals grouped into two broad classes proposals that seek to impose greater discipline on bank stockholders and proposals to increase the disciplinary role of bank debtholders finally we identify some issues that have received inadequate attention in the literature on bank regulation

symmetrical information and credit rationing graphical demonstrations as this article shows the pro debtor u s bankruptcy code alone can cause credit rationing even without asymmetrical information in the market because the code entails substantial costs to lenders if borrowers file for bankruptcy in the absence of bankruptcy cost lenders are always justified in raising interest rates and clearing markets if the bankruptcy cost is nontrivial however lenders profits are concave in the relevant range of interest rates thus lenders cannot always clear the market by using higher rates the study reported here also found that the use of collateral in debt contracts can reduce rationing but that even 100 percent collateral does not eliminate all rationing possibilities a positive relationship was found between credit risk and the amount of pledged collateral which is not necessarily true with models based on asymmetrical information

on insider privatization privatization is proceeding slowly in many eastern european countries this is largely because the insiders who currently have control but not property rights to the firms oppose outsider privatization privatization would proceed faster if governments decided to go the insider privatization route there would seem to be two strong efficiency arguments for doing so first insider privatization aligns control and property rights this gives the right incentives to insiders second if for some reason insiders cannot do the job themselves they will have the right incentives to sell the firms to those outsiders who can our paper focuses on this second argument we conclude that it is not as obvious as it seems there is a wedge between the value of the firm to insiders and the value of the firm to outsiders depending on the details of insider privatization and on the details of the resale process this wedge may prevent resale and thus prevent desirable restructuring

banks liquidity and the cost of liquidity to corporations we consider the liquidity shock banks experienced following the collapse of the asset backed commercial paper abcp market in the fall of 2007 to investigate whether banks liquidity conditions affect their ability to provide liquidity to corporations we find that banks that borrowed more from the federal home loan bank system or the federal reserve s discount window following that liquidity shock passed a larger portion of their borrowing costs onto corporations seeking access to liquidity when compared to the precrisis period this increase is larger among banks with a bigger exposure to the abcp market credit lines that pose more liquidity risk to banks and borrowers that are likely dependent on the credit line provider our findings show that the crisis that affected the banking system had a negative effect not only on the price of credit to corporations but also on the price corporations pay to guarantee access to liquidity

privatization in eastern europe irreversibility and critical mass effects abstract this paper proposes a model to shed light on two important policy features of privatization in central and eastern europe the idea of a necessary critical mass of privatization on one hand and the great difficulties encountered in the actual privatization process on the other the model incorporates a positive externality related to the size of the private sector multiple equilibria may arise for political and economic reasons policies of free distribution are analysed with the model they may eliminate the danger of policy reversals due to excess unemployment but may at the same time increase the relative cost of restructuring leading in some cases to pareto inferior outcomes

control rights and capital structure an empirical investigation we show that incentive conflicts between firms and their creditors have a large impact on corporate debt policy net debt issuing activity experiences a sharp and persistent decline following debt covenant violations when creditors use their acceleration and termination rights to increase interest rates and reduce the availability of credit the effect of creditor actions on debt policy is strongest when the borrower s alternative sources of finance are costly in addition despite the less favorable terms offered by existing creditors borrowers rarely switch lenders following a violation a fundamental question in financial economics is how do firms choose their financial policies extant empirical research on this question has focused primarily on the presence of taxes and bankruptcy costs e g scott 1976 information asymmetry e g myers and majluf 1984 and more recently market timing behavior e g baker and wurgler 2002 however beginning with jensen and meckling 1976 a large body of theoretical research examines how incentive conflicts between managers and external investors affect corporate financial policies in particular theoretical research on financial contracting shows that in the presence of incentive conflicts optimal debt contracts will allocate certain rights to creditors after negative performance in order to help firms secure financing ex ante e g aghion and bolton 1992 and dewatripont and tirole

financial heterogeneity and the investment channel of monetary policy we study the role of financial frictions and firm heterogeneity in determining the investment channel of monetary policy empirically we find that firms with low default risk those with low debt burdens and high distance to default are the most responsive to monetary shocks we interpret these findings using a heterogeneous firm new keynesian model with default risk in our model low risk firms are more responsive to monetary shocks because they face a flatter marginal cost curve for financing investment the aggregate effect of monetary policy may therefore depend on the distribution of default risk which varies over time

the relationship between economic status and child health evidence from the united states the positive relationship between socioeconomic status ses and health e g mortality and morbidity often called the gradient is well known in the social sciences an issue of contro versy about this relationship is the direction of causality does ses affect health or health affect ses anne case darren lubotsky and christina paxson 2002 examined the effect of income on the health status of children since children in developed countries are unlikely to work the relationship between income and health status is unidirectional from income to health status not only do case lubotsky and paxson hereafter clp find a positive relationship between health and income but they also find that the income gradient becomes steeper as children age the steepening gradient implies the negative effects of low family incomes on children s health become larger as a child ages with the harmful effects of low income on a child s health likely to accumulate over the child s lifetime janet currie and mark stabile 2003 highlight two limitations associated with using crosssection data as were used by clp when trying to explain the possible mechanisms underlying the relationship between ses and health first children from low ses households may be less able to recover from a particular health shock and as a result the negative effects of each shock are likely to accumulate over time second low ses children may respond to a particular shock in the same way as high ses children but are subjected to more health shocks as they age identifying which of these two mechanisms is dominant is critical for policy under the first mechanism policy would be directed at improving the access to and or quality of medical care for low ses children so they are able to respond to shocks in the same way as high ses children on the other hand if the second mechanism is dominant and low ses children respond to health shocks in the same way as high ses children social funds should be directed toward programs that reduce the arrival rate of new health shocks using data from a panel of canadian children for the period 1994 to 1998 currie and stabile cs found that given a chronic condition in 1994 low ses children were no more likely than high ses children to be in poor health in 1998 the lack of an ses differential response to a given shock after four years suggests the first mechanism above is not the cause of the increasing strength of the gradient as canadian children get older an important finding by cs is that lowses canadian children are subject to more shocks as they age thereby suggesting the impor tance of the second explanation of the strengthening of the ses health relationship 1

economic status and health in childhood the origins of the gradient the well known positive association between health and income in adulthood has antecedents in childhood not only is children s health positively related to household income but the relationship between household income and children s health becomes more pronounced as children age part of the relationship can be explained by the arrival and impact of chronic conditions children from lower income households with chronic conditions have worse health than do those from higher income households the adverse health effects of lower income accumulate over children s lives part of the intergenerational transmission of socioeconomic status may work through the impact of parents income on children s health

collateral loan quality and bank risk abstract most commercial loans are made on a secured basis yet little is known about the relationship between collateral and credit risk several theoretical studies find that when borrowers have private information about risk the lowest risk borrowers tend to pledge collateral in contrast conventional wisdom holds that when risk is observable the highest risk borrowers tend to pledge collateral an additional issue is whether secured loans as opposed to secured borrowers tend to be safer or riskier than unsecured loans empirical evidence presented here strongly suggests that collateral is most often associated with riskier borrowers riskier loans and riskier banks

what happened financial factors in the great recession abstract at the onset of the recent global financial crisis the workhorse macroeconomic models assumed frictionless financial markets these frameworks were thus not able to anticipate the crisis nor to analyze how the disruption of credit markets changed what initially appeared like a mild downturn into the great recession since that time an explosion of both theoretical and empirical research has investigated how the financial crisis emerged and how it was transmitted to the real sector the goal of this paper is to describe what we have learned from this new research and how it can be used to understand what happened during the great recession in the process we also present some new empirical work we argue that a complete description of the great recession must take account of the financial distress facing both households and banks and as the crisis unfolded nonfinancial firms as well exploiting both panel data and time series methods we analyze the contribution of the house price decline v

the effects of housing and neighborhood conditions on child mortality in this paper we estimate the causal effects on child mortality from moving into less distressed neighborhood environments we match mortality data covering the period from 1997 to 2009 with information on every child in public housing that applied for a housing voucher in chicago in 1997 n 11 680 families were randomly assigned to the voucher wait list and only some families were offered vouchers the odds ratio for the effects of being offered a housing voucher on overall mortality rates is equal to 1 13 for all children 95 ci 0 73 1 70 1 34 for boys 95 ci 0 85 2 05 and 0 21 for girls 95 ci 0 01 1 04

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

product market competition and the cost of bank loans evidence from state antitakeover laws abstract the extant literature documents a positive relationship between a firm s takeover vulnerability and its agency cost of debt using state antitakeover laws as an exogenous measure of variation in takeover vulnerability i investigate whether product market competition has a disciplinary effect that can lower a firm s cost of bank loans after taking into account the industry composition of borrowers i find that banks charge higher spreads to borrowers that are vulnerable to takeovers but only in concentrated industries in the absence of disciplinary competitive pressure the effect of takeover vulnerability on the cost of bank loans is mitigated for larger firms firms followed by analysts firms with existing credit ratings non family firms and for borrowers with shorter maturity loans or loans with covenants and collateral in place taken together the results suggest that the effect of governance on the cost of financing is not homogenous across all industries and that concentrated industry firms may need to use supplementary governance mechanisms to mitigate debt holder agency problems

the transition to a market economy pitfalls of partial reform we present a theory of a partial economic reform of a planned economy similar to the one that took place in russia since 1988 and in china earlier in such a reform some markets are liberalized in the sense that producers can sell output to whomever they want including private firms at free prices but at the same time must sell to state firms at state prices we show that such a reform can result in a substantial diversion of subsidized inputs away from state firms and toward private firms even when state firms value these inputs more the result may be a reduction of total output the simple analysis sheds light on many consequences of the soviet reform such as breakdown of coordination of production increased state policing of delivery quotas prohibitions of trading cooperatives and opposition to privatization the model also explains why partial reform failed in russia but worked in china

the pricing effect of certification on syndicated loans abstract to verify if a delegated monitor can certify its ability to perform its assigned tasks we test whether syndicated loans in which a larger share of the facility is retained by the arranger have lower interest rates for a large sample of syndicated loans in over 80 countries we find that this certification effect exists and is greater for facilities characterized by greater due diligence and monitoring efforts further for listed companies the announcement effect of the new loan on the stock price is an increasing function of the portions of the loan retained by the arranger

collateral type of lender and relationship banking as determinants of credit risk abstract this paper analyses the determinants of the probability of default pd of bank loans we focus the discussion on the role of a limited set of variables collateral type of lender and bank borrower relationship while controlling for the other explanatory variables the study uses information on the more than three million loans entered into by spanish credit institutions over a complete business cycle 1988 2000 collected by the bank of spain s credit register central de informacion de riesgos we find that collateralised loans have a higher pd loans granted by savings banks are riskier and finally that a close bank borrower relationship increases the willingness to take more risk

secured lending and default risk equilibrium analysis policy implications and empirical results the authors examine collateral in a competitive equilibrium in which borrowers can choose hidden actions and may additionally possess hidden knowledge apart from explaining the widespread use of collateral despite deadweight costs they show that an increase in the riskless interest rate causes equilibrium loan rates and collateral requirements to increase a decline in the deadweight costs of collateral reduces the equilibrium collateral use under moral hazard and an increase in the borrower s project size reduces equilibrium collateral use under moral hazard some of these predictions are tested and found to be supported by the data copyright 1991 by royal economic society

foreign entry and bank competition abstract foreign entry and bank competition are modeled as the interaction between asymmetrically informed principals the entrant uses collateral as a screening device to contest the incumbent s informational advantage both better information ex ante and stronger legal protection ex post are shown to facilitate the entry of low cost outside competitors into credit markets the entrant s success in gaining borrowers of higher quality by offering cheaper loans increases with its efficiency cost advantage this paper accounts for evidence suggesting that foreign banks tend to lend more to large firms thereby neglecting small and medium enterprises the results also explain why this observed bias is stronger in emerging markets

the paradox of pledgeability abstract we develop a model in which collateral serves to protect creditors from the claims of other creditors we find that paradoxically borrowers rely most on collateral when pledgeability is high this is when taking on new debt is easy which dilutes existing creditors creditors thus require collateral for protection against possible dilution by collateralized debt there is a collateral rat race but collateralized borrowing has a cost it encumbers assets constraining future borrowing and investment there is a collateral overhang our results suggest that policies aimed at increasing the supply of collateral can backfire triggering an inefficient collateral rat race likewise upholding the absolute priority of secured debt can exacerbate the rat race

socioeconomic status and child health why is the relationship stronger for older children case lubotsky and paxson 2001 show that the well known relationship between socio economic status ses and health exists in childhood and grows more pronounced with age however in cross sectional data it is difficult to distinguish between two possible explanations the first is that low ses children are less able to respond to a given health shock the second is that low ses children experience more shocks we show using panel data on canadian children that 1 the gradient we estimate in the cross section is very similar to that estimated previously using u s children 2 both high and low ses children recover from past health shocks to about the same degree and 3 that the relationship between ses and health grows stronger over time mainly because low ses children receive more negative health shocks in addition we examine the effect of health shocks on math and reading scores we find that health shocks affect test scores and future health in very similar ways our results suggest that public policy aimed at reducing ses related health differentials in children should focus on reducing the incidence of health shocks as well as on reducing disparities in access to palliative care

privatization technology choice and aggregate outcomes abstract we analyze the macroeconomic consequences of privatization policies in transition economies due to the particular market structure in those economies strategic completnentarities in restructuring of privatized firms occur giving rise to multiple macroeconomic equilibria restructuring and the resulting macroeconomic outcomes crucially depend on how property rights are distributed and which method of privatization is chesen firm sales to single or core investors may easily lead to bad equilibria without restructuring if employees are given profit claims this is so even if the workers give up parts of their wages as a compensation for stocks wage equity swaps contrary to conventional wisdom mass privatization can have favourable influence on micro economic efficiency and may therefore lead to a good aggregate outcome as an additional feature favouring mass privatization we argue that a big bang approach to privatization might lead to a favourable equilibrium

does corporate lending by banks and finance companies differ evidence on specialization in private debt contracting this paper establishes empirically the existence of specialization in private market corporate lending adding a new dimension to the public versus private debt distinctions now common in the literature comparing corporate loans made by banks and by finance companies we find that the two types of intermediaries are equally likely to finance information problematic firms however finance companies tend to serve observably riskier borrowers particularly more leveraged borrowers evidence supports both regulatory and reputation based explanations for this specialization in passing we shed light on various theories of debt contracting and intermediation and present facts about finance companies

house prices collateral and self employment this paper explores the role of the collateral lending channel to facilitate small business starts and self employment in the period before the financial crisis of 2008 we document that between 2002 and 2007 areas with a bigger run up in house prices experienced a strong increase in employment in small businesses compared to employment in large firms in the same industries this increase in small business employment was particularly pronounced in industries that need little startup capital and can thus more easily be financed out of increases in housing as collateral our results highlight the importance of the collateral lending channel during the period of the house price boom in the creation of small establishments we show that this effect is separate from the aggregate demand channel that relies on home equity based borrowing leading to increased demand and employment creation

asymmetric valuations and the role of collateral in loan agreements loan contracts with provision for collateral are of two general types in one the collateral may be an existing asset of the borrowing firm which is pledged to a lender in the event of default in this case collateral does not increase the assets that the borrower would lose if there is default since all the borrower s assets are attachable therefore the expected marginal cost to the borrower of providing an additional unit of collateral includes principally transactions costs associated with the collateral l this describes the usual type of commercial loan arrangement with the collateral being either equipment real estate accounts receivable or inventories in the other type of loan contract the collateral is an additional asset that is given up by the borrower if there is default that is in addition to the usual assets that are available to its lenders the borrower assigns as collateral to a creditor an asset that would normally not be legally attachable this arrangement is more common in small business loans that are secured by a personal asset e g a house of the entrepreneur likewise debt issued by a legally separate subsidiary may be secured by an asset of the parent firrn in these cases the expected marginal cost to the borrower the owner manager of the small firm or the parent corporation in the latter example of providing an additional unit of collateral

measuring the probability of financial covenant violation in private debt contracts we measure the probability that a borrower will violate financial covenants in private debt contracts we analyze hand coded data and specify standard covenant definitions using compustat data that minimize measurement error for all individual dealscan covenants we use these definitions to create a measure of aggregate probability of violation which can be used across all covenants in a loan or among covenant subsets of interest we provide evidence that our aggregate probability measure is superior to alternatives used in prior literature

collateral and competitive equilibria with moral hazard and private information the authors examine equilibrium credit contracts and allocations under different competitivity specifications and explain the economic roles of collateral under these specifications both moral hazard and adverse selection are considered the principal message is that how a competitive equilibrium is conceptualized significantly affects the characterization of equilibrium credit contracts specifically some well known results in the rationing literature are shown to rest delicately on the adopted equilibrium concept two somewhat surprising results emerge first high quality borrowers with unlimited collateral may be priced out of the market despite the bank having idle deposits second high quality borrowers may put up more collateral this paper explores the allocational consequences of alternative credit market competitivity specifications and explains the different economic roles of collateral under these specifications we model banks that lend to borrowers financing projects with payoffs depending on a priori unknown borrower attributes and ex post unobservable borrower actions borrowers are assumed to have unconstrained access to collateral our analysis is based on two concepts of competitive equilibrium under both banks compete in the sense that they earn zero expected profits however under the first concept of equilibrium ti as in jaffee and russell 11 all rents accrue to borrowers whereas under the second concept t2 all rents accrue to depositors as in stiglitz and weiss 17 our research makes two main points first we demonstrate that the manner in which a competitive equilibrium is conceptualized importantly influences the characterization of equilibrium credit allocations specifically one of the findings is that the rationing equilibria of stiglitz and weiss 17 and others should be viewed as rather delicate things in that they are very sensitive to the competitivity specification used for instance

capital structure and debt structure using a novel dataset that records individual debt issues on the balance sheets of public firms we demonstrate that traditional capital structure studies that ignore debt heterogeneity miss substantial capital structure variation relative to high credit quality firms lowcredit quality firms are more likely to have a multi tiered capital structure consisting of both secured bank debt with tight covenants and subordinated non bank debt with loose covenants we discuss the extent to which these findings are consistent with existing theoretical models of debt structure in which firms simultaneously use multiple debt types to reduce incentive conflicts jel g32

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

currency competition network externalities and switching costs towards an alternative view of optimum currency areas existing models of currency competition and monetary union ignore network effects and switching costs this paper develops a simple model that incorporates these features and shows how it can be used to shed light on observed monetary experience and current issues in international monetary relations it explains why agents will often be reluctant to switch currencies highlights the role of expectations and sheds light on the nature of currency competition and the effect of legal restrictions copyright 1993 by royal economic society

drilling and debt this paper documents a previously unrecognized debt related investment distortion using detailed project level data for 69 firms in the oil and gas industry we find that highly levered firms pull forward investment completing projects early at the expense of long run project returns and project value this behavior is particularly pronounced prior to debt renegotiations we test several channels that could explain this behavior and find evidence consistent with equity holders sacrificing long run project returns to enhance collateral values and by extension mitigate lending frictions at debt renegotiations

negotiated measurement rules in debt contracts this paper investigates contractual definitions of net income and net worth and the cross sectional variation in definitions of net income in a large sample of private debt contracts to shed light on the debt contracting demand for accounting numbers the descriptive evidence indicates that removing transitory earnings is one principal concern in the measurement of earnings but not in the measurement of net worth in the extreme contracts are never written on comprehensive income as an earnings concept whereas accumulated other comprehensive income is included in net worth in most contracts in contrast conservative adjustment in the sense of including certain types of negative earnings but not the corresponding positive earnings does not seem to be a primary consideration in measuring net income and net worth cross sectionally i find that net income is more likely to be defined differently from the gaap when net income plays a more important role in a contract when the loan maturity is longer and when transitory earnings are less useful for debt contracting collectively the evidence shows that debt contracting parties choose contracting variables in a manner consistent with efficient contracting and that transitory earnings are relatively less useful in measuring firm performance for debt contracting

disequilibrium in the uk corporate loan market in the last decade a debate has resurfaced about whether financial constraints stemming from asymmetric information and incentive problems play an important role in propagating monetary policy shocks this paper investigates the monetary transmission mechanism in the uk and its impact on the availability of bank credit to small and medium size firms the empirical specification is based on a disequilibrium model that allows for the possibility of transitory credit rationing sample firms are classified endogenously into borrowing constrained and borrowing unconstrained the analysis of credit rationing takes into account not only firm specific variables but also important macroeconomic factors such as the prevailing monetary conditions and the stage of the business cycle we find that i firms assets play an important role as collateral in mitigating borrowing constraints ii during periods of tight monetary conditions corporate demand for bank credit increases whereas the supply of bank loans is reduced iii to avoid bank credit rationing smaller companies increase their reliance on interfirm credit iv the proportion of borrowing constrained firms is significantly higher during the recession years of the early 1990s than at other times

pecuniary externalities in economies with financial frictions this article characterizes the efficiency properties of competitive economies with financial constraints in which phenomena such as fire sales and financial amplification may arise we show that financial constraints lead to two distinct types of pecuniary externalities distributive externalities that arise from incomplete insurance markets and collateral externalities that arise from price dependent financial constraints for both types of externalities we identify three sufficient statistics that determine optimal taxes on financing and investment decisions to implement constrained efficient allocations we also show that fire sales and financial amplification are neither necessary nor sufficient to generate inefficient pecuniary externalities we demonstrate how to employ our framework in a number of applications whereas collateral externalities generally lead to over borrowing the distortions from distributive externalities may easily flip sign leading to either under or over borrowing both types of externalities may lead to under or over investment

collateral and rationing sorting equilibria in monopolistic and competitive credit markets the authors examine how market structure affects credit allocation under universal risk neutrality and asymmetric information about borrowers they consider both monopolistic and perf ectly competitive banks and examine the role of collateral in each ca se when a bank is a monopolist on the loan side they find collatera l is never used and asymmetric information results in reduced bank le nding under perfect competition collateral has a useful sorting rol e moreover rationing is possible even with collateral availability and perfectly elastic deposit supply in this setting the authors sh ow co signers are valuable social welfare properties of the monopoly and competitive equilibria are also compared copyright 1987 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

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

flexibility choices and oligopolistic competition in an evolutionary environment we study the problem of the endogenous choice of technology when the level of demand is uncertain firms can choose either a flexible technology which allows them to vary the cost structure or a rigid technology which in periods of high demand is more efficient firms tend to adopt the ex ante more rewarding technology we develop a full dynamic model with given number of firms as well as with entry and exit and with perfect foresight as well as with myopic firms we show that firms with different technologies can coexist in the market in a permanent way and characterise the parameter configurations leading to such results

cost of capital and public loan guarantees to small firms in this paper we study the determinants of the spread charged by banks under a uk policy intervention scheme aimed at supporting access to the credit market for small firms through guarantee backed loans we exploit a unique dataset containing data on 29 266 guarantee backed loans under the uk sflg scheme over the period 2000 to 2005 results suggest that lower spreads are offered for loans of larger amounts and higher durations for service firms for larger firms and for those located in the most advanced regions higher spreads are applied to high tech manufacturing firms and to loans issued for working capital purposes we also find that the presence of other extant debt is associated with a relatively higher spread and that this effect is especially significant for the subset of firms that have reached a maximum debt capacity based on collateralized assets further we also find that the higher the incidence of the publicly guaranteed debt over the total amount of outstanding loans the lower on average the spread however an increase in the guaranteed coverage leads to a contraction in the spread only for loans aimed at covering working capital needs rather than investments

margin based asset pricing and deviations from the law of one price in a model with heterogeneous risk aversion agents facing margin constraints we show how securities required returns increase in both their betas and their margin requirements negative shocks to fundamentals make margin constraints bind lowering risk free rates and raising sharpe ratios of risky securities especially for high margin securities such a funding liquidity crisis gives rise to bases that is price gaps between securities with identical cash flows but different margins in the time series bases depend on the shadow cost of capital which can be captured through the interest rate spread between collateralized and uncollateralized loans and in the cross section they depend on relative margins we test the model empirically using the credit default swap bond bases and other deviations from the law of one price and use it to evaluate central banks lending facilities jel g01 g12 g13 e44 e50 the paramount role of funding constraints becomes particularly salient during liquidity crises with the one that started in 2007 being an excellent case in point banks unable to fund their operations closed down and the funding problems spread to other investors such as hedge funds that relied on bank funding therefore traditional liquidity providers became forced sellers interest rate spreads increased dramatically treasury rates dropped sharply and central banks stretched their balance sheets to facilitate funding these funding problems had significant asset pricing effects the most extreme example being the failure of the law of one price loop securities with nearly

commitment lending under asymmetric information theory and tests on u k startup data u k business startup data is used to examine the role of contract parameters in solving the bank s problem of lending under asymmetric information margins are found to be a direct function of the probability of failure and an inverse function of security for given loan size consistently with collateral being invoked to solve the moral hazard problem business survival is also found to be enhanced by owner equity inputs for given debt again consistent with a requirement for owner financial inputs to enhance unobservable effort security rises along with loan size and survival chances a finding consistent with a a firm loan size effect larger borrowers have lower marginal admin cost to the bank and with b positive borrower self selection better borrowers offer collateral because they are less likely to experience forfeiture observable business characteristics are found to play an important intermediary role in the solution to the moral hazard problem more mature proprietors have more experience business commitment assets for borrowing and the willingness to use them for loan collateral their contract parameters reflect these facts

the real effect of banking crises finance or asset allocation effects some international evidence abstract this paper analyzes whether the decline in economic growth that follows a banking crisis occurs because of a reduction in the amount of credit available finance effect or a worsening in the allocation of investable resources asset allocation effect we use a sample of more than 2500 industrial firms in 18 developed and developing countries that experienced 19 systemic banking crises between 1989 and 2007 the results indicate that banking crises negatively affect firms intangible investments which intensifies the economic downturn the negative growth effect produced by the worsening of the investment allocation is stronger in countries with highly developed financial systems and institutions

corporate structure liquidity and investment evidence from japanese industrial groups this paper presents evidence suggesting that information and incentive problems in the capital market affect investment we come to this conclusion by examining two sets of japanese firms the first set has close financial ties to large japanese banks that serve as their primary source of external finance and are likely to be well informed about the firm the second set of firms has weaker links to a main bank and presumably faces greater problems raising capital investment is more sensitive to liquidity for the second set of firms than for the first set the analysis also highlights the role of financial intermediaries in the investment process

the determinants of contract terms in bank revolving credit agreements the paper examines the determinants of contract terms on bank revolving credit agree ments revolvers of medium large publicly traded companies we model the duration maturity secured status and pricing decisions within a simultaneous decision frame work thereby overcoming the biased and inconsistent estimates in prior single equation studies of debt contract terms we find strong interrelationships between contract terms with significant bi directional relationships between duration and secured status and be tween the all in spread and commitment fees and a unidirectional relationship from both duration and secured status to all in spread we also illustrate how several single equa tion studies of contract terms draw incorrect conclusions because of their inappropriate assumption that other contract terms and leverage were exogenous finally our results sup port the hypothesis that the setting of contract terms plays an important role in alleviating contracting problems

bank finance versus bond finance we present a model with agency costs where heterogeneous firms raise finance through either bank loans or corporate bonds and where banks are more efficient than the market in resolving informational problems we document some major long run differences in corporate finance between the united states and the euro area and show that our model can explain those differences based on information availability the model fits the data best when the euro area is characterized by lower availability of public information about corporate credit risk relative to the united states and when european firms value more than united states firms banks flexibility and information acquisition role

uncertainty shocks and balance sheet recessions this paper investigates the origin and propagation of balance sheet recessions i first show that in standard models driven by tfp shocks the balance sheet channel disappears when agents can write contracts on the aggregate state of the economy optimal contracts sever the link between leverage and aggregate risk sharing eliminating the concentration of aggregate risk that drives balance sheet recessions i then show that uncertainty shocks can help explain this concentration of aggregate risk and drive balance sheet recessions even with contracts on aggregate shocks the mechanism is quantitatively important and i explore implications for financial regulation

regional determinants of small firm loans under the u k loan guarantee scheme the loan guarantee scheme was initiated in 1981 in order to alleviate a perceived constraint in the ability of small firms to secure bank finance due to a lack of collateral this paper shows that a national small firms support scheme has at the point of delivery had quite different coverage across regions briefly the initial evidence suggests that the northern regions of england have been the major net beneficiaries of the scheme primarily at the expense of northern ireland and scotland further analysis identified house prices as the single most important determinant of loan size acting via a collateral effect on loan numbers and value fixed regional effects were dominant particularly in the south east and north west

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

role of collateral and personal guarantees in relationship lending evidence from japan s sme loan market this paper investigates the determinants of the use of collateral and personal guarantees in japan s sme loan market we find that firms riskiness does not have a significant effect on the likelihood that collateral is used we find however that main banks whose claims are collateralized monitor borrowers more intensively and that borrowers who have a long term relationship with their main banks are more likely to pledge collateral these findings are consistent with the theory that the use of collateral is effective in raising the bank s seniority and enhances its screening and monitoring this incentive effect for the bank becomes tenuous for personal guarantees

critical mass effect and restructuring in the transition towards a market economy abstract restructuring firms in a transition economy produces a sort of network externality in that the profitability of restructuring depends on the number of firms that already adopted this strategy we investigate under what conditions a critical mass exists i e a situation in which such externality is positive and restructuring spurs imitation possibly leading to the eventual transformation of the whole economy we find a critical mass effect when the main effect of restructuring is an increase in value added i e aggregate demand rather than an increase in the firm s ability to compete against rival home firms the critical mass case becomes the typical one when competition spurs firms efficiency

a factor analytic approach to bank condition abstract this paper explores a new approach to early warning systems for commercial banks factor analysis and logit estimation are used to measure the condition of individual institutions and to assign each of them a probability of being a problem bank the model employs widely used financial ratios and information taken from bank examinations the factors produced by the model for use in the logit estimation are very similar to the camel rating system used by bank examiners empirical results show that the combination of factor analysis and logit estimation is a promising method of evaluating bank condition

health in the cities when the neighborhood matters more than income using a rich italian cross sectional dataset we estimate the effect of a neighborhood problems aggregate including pollution crime and noise on self assessed health presence of chronic conditions and limitations in daily activities we address the self selection of the residents in their neighborhoods as well as the possible endogeneity of income with respect to health through instrumental variable methods and several endogeneity tests the main novelty is the sound estimation of the neighborhood effect on health using observational data which has the advantage of providing general results that are not dependent on any experimental design this allows us to fully compare the neighborhood effect with the traditional socioeconomic determinants of health our main findings are that low quality neighborhoods are strongly health damaging this effect is comparable to the primary upper secondary education health differential and is even higher than the impact that poor economic circumstances have on health

the costs of bankruptcy chapter 7 liquidation versus chapter 11 reorganization our paper explores a comprehensive sample of small and large corporate bankruptcies in arizona and new york from 1995 to 2001 bankruptcy costs are very heterogeneous and sensitive to the measurement method used we find that chapter 7 liquidations appear to be no faster or cheaper in terms of direct expense than chapter 11 reorganizations however chapter 11 seems to preserve assets better thereby allowing creditors to recover relatively more our paper also provides a large number of further empirical regularities our paper analyzes the largest sample of corporate bankruptcies to date we research approximately 300 cases from the arizona and new york federal bankruptcy courts from 1995 to 2001 these cases consist of 1 both publicly traded and privately held corporations and 2 both chapter 7 liquidations and chapter 11 reorganizations this sample is practically the entire population of unique corporate bankruptcies in these courts our paper s primary objective is to measure how the two available bankruptcy procedures differ especially but not only in terms of cost we explore four variables namely the change in the estate s value during bankruptcy a measure of indirect costs the time spent in bankruptcy another and more common measure of indirect costs the expenses submitted to and approved by the bankruptcy court a measure of direct costs and the recovery rates for creditors and apr violations our most important findings are that chapter 7 liquidations are not cheaper than chapter 11 reorganizations particularly after we control for endogenous self selection of firms into bankruptcy procedure bankruptcy professionals attorneys accountants trustees regularly end up with most of the post bankruptcy firm s value in chapter 7 arturo bris is at imd yale school of management and ecgi ivo welch is at brown uni

the effects of competition on executive behavior economists presume that competition spurs a firm to be more efficient by forcing it to reduce its agency problems this article investigates this presumption it finds that the effects of competition on executive behavior can be decomposed into four effects each of which is of potentially ambiguous sign theory thus offers no definitive defense of this presumption this article also derives sets of conditions under which increased competition has the presumed effect of reducing agency problems in some sets important conditions are that increased competition reduce the executive s expected income and that agency goods e g shirking be normal goods for the executive the article shows that an increase in the shareholder bargaining strength can both reduce the agency problem and make it more sensitive to competition

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

monetary policy in a financial crisis what are the economic effects of an interest rate cut when an economy is in the midst of a financial crisis under what conditions will a cut stimulate output and employment and raise welfare under what conditions will a cut have the opposite effects we answer these questions in a general class of open economy models where a financial crisis is modeled as a time when collateral constraints are suddenly binding we find that when there are frictions in adjusting the level of output in the traded good sector and in adjusting the rate at which that output can be used in other parts of the economy then a cut in the interest rate is most likely to result in a welfare reducing fall in output and employment when these frictions are absent a cut in the interest rate improves asset positions and promotes a welfare increasing economic expansion

firm leverage consumer demand and employment losses during the great recession this article argues that firms balance sheets were instrumental in the transmission of consumer demand shocks during the great recession using micro level data from the u s census bureau we find that establishments of more highly levered firms experienced significantly larger employment losses in response to declines in local consumer demand these results are not driven by firms being less productive having expanded too much prior to the great recession or being generally more sensitive to fluctuations in either aggregate employment or house prices likewise at the county level we find that counties with more highly levered firms experienced significantly larger declines in employment in response to local consumer demand shocks accordingly firms balance sheets also matter for aggregate employment our results suggest a possible role for employment policies that target firms directly besides conventional stimulus