Lock‐In Effects in Relationship Lending: Evidence from DIP Loans

Do prior lending relationships result in pass‐through savings (lower interest rates) for borrowers, or do they lock in higher costs for borrowers? Theoretical models suggest that when borrowers experience greater information asymmetry, higher switching costs, and limited access to capital markets, they become locked into higher costs from their existing lenders. Firms in Chapter 11 seeking debtor‐in‐possession (DIP) financing often fit this profile. We investigate the presence of lock‐in effects using a sample of 348 DIP loans. We account for endogeneity using the instrument variable (IV) approach and the Heckman selection model and find consistent evidence that prior lending relationship is associated with higher interest costs and the effect is more severe for stronger existing relationships. Our study provides direct evidence that prior lending relationships do create a lock‐in effect under certain circumstances, such as DIP financing.     

International transmission of financial shocks in an estimated DSGE model

This paper investigates the transmission of financial shocks across large economies. To quantify these effects, we estimate a two-region open economy DSGE model that includes frictions in credit markets. The baseline model fails to replicate the high correlation between the U.S. and Euro Area macroeconomic variables. Allowing for an ad hoc, cross-regional correlation in financial shocks considerably improves the model's ability to match the data. We extend the baseline model by including global banks, and generate an endogenous cross-regional correlation of borrowing costs. Simulations demonstrate large spillover effects, and highlight the importance of including frictions in international financial contracts for more accurately capturing the high cross-regional correlation.     

North-South : The implications for multinational banking

International finance should be of great value to developing countries because their potential growth paths are ‘out of step’ with the world economy and because the gambles they must take to develop are much more diversifiable in the context of the world economy than locally. However, the actual benefits of North-South finance have been limited by an overreliance on non-specific bank credit with the inherent limitations and by errors in judgement by both borrowers and lenders. In fact, the current crisis threatens to reverse many of the earlier gains. While the current crisis is primarily the result of the world recession, the severity of its effects on lenders and borrowers reflects three key aspects of bank credits: (1) its perverse real repayment patterns, (2) its specific nature which implies that risks are transferred only through generalized non-performance with its attendant deadweight costs, and (3) its concentration in a small but critical segment of capital markets. These characteristics would be serious even with ideal behavior by lenders and borrowers, but they also can lend to inappropriate and possibly erratic behavior. Specific suggestion for restructuring the system of North-South finance are given including (1) smoothing repayment patterns, (2) increasing repayment flexibility, (3) increasing risk-bearing non-specific finance, (4) increasing non-recourse financing, and (5) increasing project-specific risk capital.     

Firm Value,Information Problems and the Internal Capital Market

We examine how information problems between the firm and the investor affect the value of an internal capital market. While the extant literature finds that, on average, the diversified firm's access to an internal capital market is positively related to firm value, this paper finds that the results hold only for firms which face low levels of information problems. Firms facing the high levels of information problems realize no value from internal capital market access, consistent with the Jensen Free Cash Flow hypothesis. When information problems are large, agency costs dominate any savings that result from using an internal capital market to avoid selling under-priced securities in the external capital markets.     

Defaults and interest rates in international lending

Since lenders cannot observe the riskiness of the projects that borrowers could choose, interest rates alone cannot be used as an instrument to discipline borrowers. A credible threat to exclude borrowers who default more than a certain number of times from participating in the capital markets makes international debt contracts incentive compatible. Since larger borrowers get fewer chances to default, they choose safer projects and are therefore charged lower interest rates. Also, borrowers, after each successive default, switch to safer and safer projects, which may result in lower and lower interest rates. This paper provides empirical evidence supporting these two predictions.     

Risk sharing,finance, and institutions in international portfolios

We develop a standard model to show how transaction costs in international investment affect conventional tests of consumption risk sharing, both in a multilateral and a bilateral setting. We implement the tests in a novel international data set on bilateral holdings of equity, bonds, foreign direct investment (FDI) and bank loans. In our data, high foreign capital holdings are associated with international consumption risk sharing as implied by our theory. This is especially true of investment in equity or bonds, but not of foreign direct investment or bank loans. In our model, the implication is that transaction costs are higher for FDI and international loans. The discrepancy could reflect technological differences, but also the prospect of expropriation, perhaps most stringent for FDI or loans. We argue that expropriation risk is endogenous to both the borrower's institutions and its openness to international markets. The detrimental impact of poor institutions is muted in open economies, where the possibility of subsequent exclusion from world markets deters expropriation of foreign capital. We show the implied effects of institutions prevail in both the cross-section of consumption risk sharing and in observed international investment patterns.     

Firm balance sheets and monetary policy transmission

The functioning of internal capital markets in financial conglomerates facilitates a novel identification strategy of the balance sheet channel of monetary policy. We look at small subsidiary banks that are affiliated with the same holding company but operate in different geographical areas. These banks face the same marginal cost of funds due to internal capital markets, but face different borrowers as they concentrate their lending with small local businesses. Exploring cross-sectional variation in local economic conditions across these subsidiaries, we investigate whether borrower creditworthiness influences the response of bank lending to monetary policy. Our results are consistent with a demand-driven transmission mechanism that works through firm balance sheets and is independent from the bank lending channel.     

INTERNATIONAL BANK FLOWS TO EMERGING MARKETS: INFLUENCE OF SOVEREIGN CREDIT RATINGS AND THEIR REGIONAL SPILLOVER EFFECTS

We examine whether changes in sovereign credit assessments help determine international bank flows to emerging countries. We focus on the bank flows of G7 countries to a sample of 55 emerging market borrowers for 1995–2008. We find evidence indicating that sovereign credit rating revisions have significant and positive influences on international bank flows from developed markets even after controlling for other determinants. In addition, we find strong regional rating spillover effects. Ratings improvements in one emerging market region tend to reduce bank flows to the other regions. However, there is an exception from the Asia Pacific to Eastern Europe.     

地理距离、契约设计与企业内部资本市场借贷风险防控——来自中国企业集团内部借贷交易的证据

地理因素对保持距离型市场交易的影响已被大量文献证实,但系统考察地理因素是否以及如何影响企业内部经济活动的研究仍十分匮乏。基于手工搜集整理的企业集团内部委托贷款这一独特数据,我们实证考察了地理距离对企业集团内部借贷契约设计的影响及相关的风险防控问题。实证结果显示,借贷距离越远,针对借款者的契约设计越严苛,不仅贷款者更可能要求借款者提供抵押担保,而且对资金用途施加限制的概率也大幅增加。进一步研究发现,与地理距离阻碍了信息搜集和监督的经济直觉一致,距离对企业内部借贷契约严苛性的推高作用会因为借贷双方之间的信息摩擦问题差异而改变。而且,基于借贷违约信息的检验结果表明,作为应对信息不对称的机制,动态调整契约严苛性这一精巧契约设计有效降低了企业内部贷款违约风险。本文不仅增进了对地理因素影响企业内部资本配置的认识,而且加深了对企业内部借贷契约设计的理解,从而对如何有效防控企业内部资本市场运作风险具有启示意义。     

地理距离、契约设计与企业内部资本市场借贷风险防控——来自中国企业集团内部借贷交易的证据

地理因素对保持距离型市场交易的影响已被大量文献证实,但系统考察地理因素是否以及如何影响企业内部经济活动的研究仍十分匮乏。基于手工搜集整理的企业集团内部委托贷款这一独特数据,我们实证考察了地理距离对企业集团内部借贷契约设计的影响及相关的风险防控问题。实证结果显示,借贷距离越远,针对借款者的契约设计越严苛,不仅贷款者更可能要求借款者提供抵押担保,而且对资金用途施加限制的概率也大幅增加。进一步研究发现,与地理距离阻碍了信息搜集和监督的经济直觉一致,距离对企业内部借贷契约严苛性的推高作用会因为借贷双方之间的信息摩擦问题差异而改变。而且,基于借贷违约信息的检验结果表明,作为应对信息不对称的机制,动态调整契约严苛性这一精巧契约设计有效降低了企业内部贷款违约风险。本文不仅增进了对地理因素影响企业内部资本配置的认识,而且加深了对企业内部借贷契约设计的理解,从而对如何有效防控企业内部资本市场运作风险具有启示意义。     

Exchange market pressure and absorption by international reserves: Emerging markets and fear of reserve loss during the 2008–2009 crisis

This paper evaluates how the global financial crisis emanating from the U.S. was transmitted to emerging markets. Our focus is on the extent that the crisis caused external market pressures (EMP), and whether the absorption of the shock was mainly through exchange rate depreciation or the loss of international reserves. Controlling for variety of factors associated with EMP, we find clear evidence that emerging markets with higher total foreign liabilities, including short- and long-term debt, equities, FDI and derivative products—had greater exposure and were much more vulnerable to the financial crisis. Countries with large balance sheet exposure – high external portfolio liabilities exceeding international reserves—absorbed the global shock by allowing greater exchange rate depreciation and comparatively less reserve loss. Despite the remarkable buildup of international reserves by emerging markets during the period prior to the financial crisis, countries relied primarily on exchange rate deprecation rather than reserve loss to absorb most of the exchange market pressure shock. This could reflect a deliberate choice (“fear of reserve loss”) or market actions that caused very rapid exchange rate adjustment, especially in emerging markets with open capital markets, overwhelming policy actions.     

Geographic diversification and agency costs of debt of multinational firms

This paper examines the agency conflicts between shareholders and bondholders of multinational and non-multinational firms and provides an explanation for the puzzle that multinational firms use less long-term debt, but more short-term debt than domestic firms. Using a sample of 6951 firm–year observations for multinational and domestic firms over the 1988–1994 period, we find that alternative measures of agency costs have statistically significant negative effects on the firm's long-term leverage. The results, however, also show that the negative effects of agency costs of debt on long-term leverage are significantly greater for multinational than non-multinational firms. It is documented that the effect of the agency costs of debt on leverage are increased by the firm's degree of foreign involvement. The evidence shows that firm's increasing foreign involvement exacerbates agency costs of debt leading to lower (greater) use of long-term (short-term) debt financing. This result is also confirmed using alternative measures of foreign involvement. The evidence is consistent with the view that multinational corporations (MNCs) are susceptible to higher agency costs of debt than domestic corporations because geographic diversity renders active monitoring more difficult and expensive in comparison to domestic firms. The results fail to support the view that MNCs' lower long-term debt ratios are due to the advantages of the internal capital markets.     

Does the cost of capital differ across countries? An agency perspective*

In this keynote speech, I ask the question: Does the cost of capital differ for firms located in different countries? I argue that there are two ways to look at the cost of capital. First, there is the neoclassical perspective, which assumes that there are no agency problems. In integrated markets, the neoclassical cost of capital is the same in every country. Second, there is the agency perspective. Agency costs increase the cost of capital understood as the expected rate of return necessary for an investment to leave the value of the firm unaffected. Adjusting the cost of capital for agency costs, I argue that it differs across countries because of differences in corporate governance. I then provide a comparison of the agency-adjusted cost of capital between Japan and the US.     

Sharing rules and equilibrium in an international capital market under uncertainty

International capital market equilibrium is characterized for a world economy in which consumption preferences are defined multiplicatively over many commodities. It is shown that the set of relative asset prices under pure exchange in international capital markets depends on the real purchasing power of nominal payoffs under uncertainty and does not depend on the currency in which the nominal payoffs are denominated. A Sharpe-Lintner type international capital asset pricing model is derived as a special case. Proportional ad valorem commodity taxes and transportation costs are incorporated in the valuation model, interest rate parity and purchasing power parity are reinterpreted under uncertainty, and international differences in borrowing and lending are shown to reflect, in part, differences in risk aversion across countries.     

The Role of Financial Market Structure and the Trade Elasticity for Monetary Policy in Open Economies

Imperfect international risk sharing and exchange rate volatility matter for how monetary policy should optimally be conducted in an open economy through affecting policymakers’ terms of trade considerations. I study these motives for a classical and long‐standing question in international monetary economics: the size of potential gains from international policy coordination. In a relatively standard model I allow for various degrees of risk sharing by considering different assumptions on international financial markets, and a large region for the crucial parameter of the trade elasticity. When incomplete markets give rise to high volatility of international prices and poor risk sharing—such as in Corsetti, Dedola, and Leduc (2008) —gains from policy coordination are an order of magnitude larger than previous studies, working under the assumptions of complete markets, suggest.     

营业准入制度的国别效应分析

营业准入制度的国别效应是指国际资本、跨国投资、国际产业分工和全球贸易对不同国家或地区营业准入制度设计、调整和变化的反应程度.以国际资本的流动为例,从静态来分析,表现为营业准入限制国的资本挤出效应和营业准入开放国的资本集聚效应;从动态来分析,则表现为营业准入限制国因制度调整而创造的投资洼地效应和营业准入开放国因制度供给过剩而产生的资本溢出效应.对欠发达国家和营业准入限制国来说,适度地对其营业准入制度进行有效的调整,选择自由、开放型营业准入制度,可以解决营业准入方面的制度不公和制度供给不足问题,进而以营业准入制度优势来换取国家竞争优势.     

Stock exchange competition in a simple model of capital market equilibrium

This paper uses a simple model of mean-variance capital markets equilibrium with proportional transactions costs to analyze the competition of stock markets for investors. We assume that equity trading is costly and endogenize transactions costs as variables strategically influenced by stock exchanges. Among other things, the model predicts that increasing financial market correlation leads to a decrease of transaction costs, an increase in cross-border trading activity, and to a decrease in the home bias of international equity flows. These predictions are consistent with the recent evolution of international stock markets.     

投资者保护研究综述：财务会计信息的作用

资本市场的信息不对称不仅阻碍了资源的有效配置,而且妨碍了投资者获取投资回报。财务会计信息在投资者保护中具有重要作用,它可以减轻由于信息不对称带来的两个基本问题:信息问题和代理问题。本文提出一个扩展的框架分析财务会计信息在缓解信息不对称、促进投资者保护中的作用机制,以及公司层面、市场层面和国家层面一些重要因素对这种作用机制的影响。在此基础之上,本文综述了近期国外研究中的主要相关文献,并为未来研究提出建议。     

Price Stability with Imperfect Financial Integration

This paper studies whether the international monetary system can be affected by asymmetries in the cross-country positions in the international financial markets, i.e., the fact that some countries are large debtors while others are creditors. An important channel that is explored is the interaction between international risk sharing and the stabilization role of monetary policy in each country. The main finding is that the welfare costs of incomplete markets and the gains of deviating from a policy of price stability are increasing with the cross-country asymmetries in the initial net international positions and in particular they become nonnegligible when the persistence of the shocks increases (1% of a permanent shift in steady-state consumption, for the welfare costs of incomplete markets, and 0.2%, for the gains of deviating from a policy of price stability). When global imbalances become larger, optimal monetary policy requires an increase in the volatilities of the real returns on assets and in particular of the nominal interest rates, which should happen to be more correlated across countries.     

Agency Cost,Dividend Policy and Growth: The Special Case of REITs

Dividend distribution enhances information transmission, and mitigates agency conflicts by restricting managers’ access to free cash flow, and exposing firms to the scrutiny and monitoring by market participants when raising external capital. The reduction in agency costs and improvement in information dissemination reduce the cost of funds, and investment at more competitive cost of capital enhances firm value. For REITs, because of the mandated high dividend distribution, growth depends on the availability of external capital at competitive rates, such that mitigation of agency costs is critical to sustain growth. We examine the relation between dividends and growth with a sample of U.S. equity REITs. Our data reveal a significantly positive relation between externally financed growth and dividend payments. The relation is stronger among REITs with more growth opportunities, and REITs that issue new equity and debt. We interpret this evidence as consistent with the notion that by reducing agency costs and facilitating capital raising, dividends enhance growth.