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Yet investment grade firms tend to be reluctant to issue secured debt at all times. In contrast, we find that for firms that are rated below-investment grade, the likelihood of secured debt issuance increases as firm’s credit quality deteriorates, the economy slows, or average credit spreads widen. This differential pattern of issue behavior is consistent with highly rated firms seeing unencumbered collateral as a form of insurance, to be used only in extremis. In particular, reviews we study how commercial banks have developed "firewalls" to address potential conflicts of interest when they are also engaged in investment banking. Banking crises are usually followed by a decline in credit and growth. Is this because crises tend to take place during economic downturns, or do banking sector problems have independent negative effects on the economy? To answer this question we examine industrial sectors with differing needs for financing.

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Consequently, such borrowers prefer retaining financial flexibility by not giving security reviews up front. Instead, security is given contingently – when a firm approaches distress.

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We then allow for governance provided by external financiers and show that external governance, … This pattern of issue behavior is consistent with theories that see collateral as a form of insurance, to be used only in extremis. How does the development of the financial sector affect industrial growth? What effect does it have on the composition of industry, and the size distribution of firms? What is the relative importance of financial institutions and financial markets, and does it depend on the stage of economic growth? How do financial systems differ in their vulnerability to crisis? This paper attempts to provide an answer to these questions based on the current state of empirical research.

  • To answer this question we examine industrial sectors with differing needs for financing.
  • On Saturday, May 7, Inara Virani and Brian Harrington will draw on shared student experiences and their own unique stories to connect with graduates and guests.
  • Some of these distinctive patterns existed prior to the beginning of economic reforms in the 1980s, and stem from the idiosyncratic policies adopted after …
  • Internal governance can mitigate agency problems and ensure that firms have substantial value, even with little or no external governance by investors.

The model of crises described here differs in some important aspects from what is now termed the first, second, and third generation … Because borrowers typically cannot repay investors on demand, investors will require a premium or significant control rights when they lend to borrowers directly, as compensation … In this paper we examine data on firm size from Europe to shed light on factors correlated with firm size. Business Lists Directory is dedicated to helping people grow successful B2B businesses, from high-growth start-ups to home-based business owners. Our mission is to help businesses access the information they need to run successful direct marketing campaigns.

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Although there are many theories explaining why non-financial firms lend money, there are few comprehensive empirical tests of these theories. This paper studies the long run effects of financial crises using new bank and town level data from around the Great Depression. We find evidence that banking markets became much more concentrated in areas that experienced a greater initial collapse in the local banking system. There is also evidence that financial regulation after the Great Depression, and in particular limits on bank branching, may have helped to render the effects of the initial collapse persistent. All of this suggests a reason why post-crisis financial regulation, while potentially reducing financial instability, might also have longer run real consequences. Lenders are unwilling to accept lower credit spreads for secured debt relative to unsecured debt when a firm is healthy.

In a developing country that saves little, the government may engage in repressive policies to enhance its debt capacity, which only ensures that successor governments repress as well. This leads to a “growth trap” where household steady-state consumption is lower than if … We develop a theory of how corporate lending and financial intermediation change based on the fundamentals of the firm and its environment. We focus on the interaction between the prospective net worth or liquidity of an industry and the firm’s internal governance or pledgeability. Variations in prospective liquidity can induce changes in the nature, covenants, and quantity of loans that are made, the identity of the lender, and the extent to which the lender is leveraged. We offer predictions on how these might vary over the financial cycle. We study why acquisitions of entrant firms by an incumbent can deter innovation and entry in the digital platform industry, where there are strong network externalities and some customers face switching costs.

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They typically offered demand deposits, made loans on demand, and were regulated. Each of these aspects of the institutional structure were essential in helping the bank provide the twin functions of liquidity and safety. I argue that recent theories of banking, which I collectively refer to as "Incomplete Contract" theories of banking, explain well the origins of banking. Investors desire liquidity because they are uncertain about when they will want to eliminate their holding of a financial asset.

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Since average lending distance is easily measurable, it is potentially a useful measure for bank supervisors. Although monitoring borrowers is thought to be a major function of financial institutions, the presence of other claimants reduces an institutional lender’s incentive to engage in costly monitoring. Thus loan contracts must be structured so as to enhance this incentive. Short-term debt gives the lender the power to force renegotiation or liquidation when the debt matures, but this ability is not contingent on monitoring. By contrast, covenants make the loan’s effective maturity, and the … Commercial banks emerged at a time when contracts were very incomplete and property rights insecure.