Downstream Value of Upstream Finance

We examine market value implications of managing liquidity via supplier financing. Results suggest a direct link between shareholder wealth and use of trade credit, and the relation exhibits significant cross‐sectional variation. In particular, the market value of trade credit varies with the liquidity of goods sold and competition in product markets. Evidence also indicates the value‐supplier financing association strengthens with financial constraint, which supports the financing motive for trade credit. Further findings are consistent with the transaction cost motive. Overall, we conclude that shareholders value the strategic benefits associated with supplier financing and that downstream firms’ characteristics influence this value.     

Internal capital networks as a source of MNC competitive advantage: Evidence from foreign subsidiary capital structure decisions

This paper documents multinational company (MNC) strategic advantages arising from its internal financial network. Using data from US multinational company affiliates in 62 countries, we show that MNC affiliates in countries with low credit availability, poor creditor protections, high political risks, and high inflation are found to bear high interest costs and multinational affiliate debt ratios are high in high tax countries. In addition, affiliates in countries with high (low) credit availability, a high (low) corruption index, low (high) political risks and high (low) currency depreciation are found to carry high external (parent) debt ratios. We also find that currency depreciation, credit availability, and location in common law countries are negatively associated with the use of parent (relative to external) debt. Thus, our findings suggest that affiliates substitute external debt with parent debt using internal capital markets to overcome weak external financial markets and institutional environments. This is important evidence of the strategic competitive advantage based on financial networks enjoyed by MNCs.     

The make-buy decision in marketing financial services for poverty alleviation

In this article, we suggest how poverty reduction can be achieved through alleviation measures that enable the poor to satisfy their needs by focusing on the needs of others. Instead of a direct focus on the consumption needs of the poor, we suggest an indirect approach to satisfying these needs, by providing the poor with credit and consulting services for entrepreneurial businesses that focus on the needs of buyers. Loans to the poor who lack collateral are increasingly based on group lending techniques that rely on joint liability to secure repayment, which have come to be known as microfinance. We suggest that in addition to credit, financial services for the poor must include strategic advice and assistance to select markets, and make the products (goods and services) for sale in their output markets with the financial services bought in their input markets. Financial services for the poor must include not only money to invest in a business but also consulting services to help the business succeed. The provision of consulting services will also facilitate monitoring and enforcement, increasing loan repayment. Depending on poverty levels, the extent of bundling credit and consulting services will vary with one or more organizations emerging to meet the needs of different segments. We suggest that poverty alleviation is achieved by the poor focusing on the needs of others in their output market, and outsourcing financial services to one or more suppliers in their input markets.     

Lending Booms and Lending Standards

We examine how the informational structure of loan markets interacts with banks' strategic behavior in determining lending standards, lending volume, and the aggregate allocation of credit. We show that, as banks obtain private information about borrowers and information asymmetries across banks decrease, banks may loosen their lending standards, leading to an equilibrium with deteriorated bank portfolios, lower profits, and expanded aggregate credit. These lower standards are associated with greater aggregate surplus and greater risk of financial instability. We therefore provide an explanation for the sequence of financial liberalization, lending booms, and banking crises observed in many emerging markets.     

A credit scoring model for Vietnam's retail banking market

As banking markets in developing countries are maturing, banks face competition not only from other domestic banks but also from sophisticated foreign banks. Given the substantial growth of consumer credit and increased regulatory attention to risk management, the development of a well-functioning credit assessment framework is essential. As part of such a framework, we propose a credit scoring model for Vietnamese retail loans. First, we show how to identify those borrower characteristics that should be part of a credit scoring model. Second, we illustrate how such a model can be calibrated to achieve the strategic objectives of the bank. Finally, we assess the use of credit scoring models in the context of transactional versus relationship lending.     

Credit markets and financial information

The last decade has seen rapid growth in trading of credit instruments on secondary markets. The ensuing availability of a rich set of credit market data has created a novel environment for testing a variety of financial economic theories. In this discussion, we provide a simple framework for linking asset pricing research using equity and credit market data and offer some suggestions for future archival empirical research aiming to establish relations between financial information and credit markets. Credit instruments are intrinsically linked to equity instruments. The strength of this link varies temporally and cross-sectionally in measurable ways that can, and should be, used to guide future empirical research linking information to credit markets.     

Emerging Bond Market Volatility and Country Spreads

Using JPMorgan's emerging market bond index, this paper analyzes how increases in country credit spreads can persist in emerging bond markets. The results of T-GARCH regressions show that, during financial crisis periods, emerging countries' credit spreads may increase persistently as a result of interaction between changes in spreads and volatilities, making emerging bond markets more turbulent. The results suggest that emerging countries should endeavor to develop a stabilization mechanism by enhancing information efficiency in bond markets. In particular, because Asian countries have experienced persistent, overreactive volatility, this paper implies that Asian countries should work together more closely during financial crisis periods.     

Incorporating Systemic Influences Into Risk Measurements: A Survey of the Literature

Procyclicality has emerged as a potential drawback to adoption of risk-sensitive bank capital requirements. Systematic risk factors may result in increases (decreases) in bank capital requirements when the economy is depressed (overheated), thereby decreasing (increasing) bank lending capacity and exacerbating business cycle fluctuations. Procyclicality may result from systematic risk emanating from common macroeconomic influences or from interdependencies across firms as financial markets and institutions consolidate internationally. We survey the literature on cyclical effects on operational risk, credit risk and market risk measures.     

Price discovery of credit spreads in tranquil and crisis periods

In this paper we investigate the price discovery process in single-name credit spreads obtained from bond, credit default swap (CDS), equity and equity option prices. We analyse short term price discovery by modelling daily changes in credit spreads in the four markets with a vector autoregressive model (VAR). We also look at price discovery in the long run with a vector error correction model (VECM). We find that in the short term the option market clearly leads the other markets in the sub-prime crisis (2007–2009). During the less severe sovereign debt crisis (2009–2012) and the pre-crisis period, options are still important but CDSs become more prominent. In the long run, deviations from the equilibrium relationship with the option market still lead to adjustments in the credit spreads observed or implied from other markets. However, options no longer dominate price discovery in any of the periods considered. Our findings have implications for traders, credit risk managers and financial regulators.     

Credit derivatives, capital requirements and opaque OTC markets

In this paper we study the optimal design of credit derivative contracts when banks have private information about their ability in the loan market and are subject to capital requirements. First, we prove that when banks are subject to a maximum loss capital requirement the optimal signaling contract is a binary credit default basket. Second, we show that if credit derivative markets are opaque then banks cannot commit to terminal-date risk exposure, and therefore the optimal signaling contract is more costly. The above results allow us to discuss the potential implications of different capital adequacy rules for the credit derivative markets.     

On the nature of credit demand and credit rationing in competitive credit markets

Conventional analyses of the credit rationing problem seek to explain that problem within the context of classic demand analysis. In this paper we demonstrate that it is generally inappropriate to apply the notion of classic demand to credit markets, consequently, conventional notions of credit rationing must be rejected. In providing a new definition of credit rationing we also establish the previously rejected characterized by credit rationing.     

Financial Reporting and Credit Ratings: On the Effects of Competition in the Rating Industry and Rating Agencies' Gatekeeper Role

This paper studies firms' financial reporting incentives in the presence of strategic credit rating agencies and how these incentives are affected by the level of competition in the rating industry and by rating agencies' role as gatekeepers to debt markets. We develop a model featuring an entrepreneur who seeks project financing from a perfectly competitive debt market. After publicly disclosing a financial report, the entrepreneur can purchase credit ratings from rating agencies that strategically choose their rating fees and rating inflation. We derive the following core results: (1) More rating industry competition leads to stronger corporate misreporting incentives if ratings are sufficiently precise or if rating agencies assume a gatekeeper role. Under imperfect rating industry competition, (2) agencies' gatekeeper role primarily weakens firms' misreporting incentives, which then influences rating agencies' strategies, and (3) firms' misreporting and rating agencies' rating inflation can be strategic complements when agencies assume a gatekeeper role. (4) Regulatory initiatives aimed at increasing rating industry competition or at weakening rating agencies' gatekeeper role improve investment efficiency as long as corporate misreporting incentives are not significantly strengthened.     

Twin Booms: The Lead–Lag Relation Between Credit and Housing Booms

In this study, we examine the causal relation between credit (proxied by credit-to-GDP ratio) and house markets (proxied by house price index) using data of using thirty-six countries for the period 1996–2012. We find a bidirectional causal relation between the two markets using the whole sample. Then, we find that during the non–twin boom period, the results are the same as those using the whole sample. During the twin boom periods, the two markets are not linked using the boom definition of deviation from the trend, and the housing market leads the credit market using the boom definition of the growth rate exceeding a certain 15 percent.     

Pricing financial services innovations

The number of innovative financial solutions introduced to markets has grown considerably in the past decade owing to emerging digital technologies, deregulation and market fragmentation. Examples are abundant in the worldwide markets for insurance, credit products and transaction processing services. A question of growing interest is how firms should price these innovations. The optimal introductory pricing of financial innovations may vary as a function of factors such as price sensitivity of the market and competitors’ ability to introduce competing financial solutions. In this article, we examine the role of these factors in the optimal pricing of a financial innovation. Using an agent-based simulation framework, introductory pricing strategies that maximize profitability under various market conditions are identified. Results indicate that lower levels of market price sensitivity and longer time horizons for competitive entry create pricing opportunities for financial innovators. However, the relationship becomes more complex as market price sensitivity increases or competitive market entry becomes more immediate. Detailed recommendations for optimal pricing of financial innovations under various market conditions are provided, and the article concludes with strategic recommendations for pricing innovative financial services.     

Are credit default swaps still a sideshow? How information flow between equity and CDS markets has changed since the financial crisis

We examine the information flow between equity and credit default swap (CDS) markets using firm-level returns data before and after the global financial crisis. Before the crisis, the information flow was unidirectional, with equity returns leading CDS returns. While equity returns continue to lead CDS returns after the crisis, we find that the speed of adjustment of the CDS market to equity markets has increased during this period. We also find evidence of a bidirectional flow of information between these markets, with equity returns responding to credit protection returns in the postcrisis period. The quicker response of CDS spreads to equity returns during the postcrisis period primarily occurs among entities with lower credit ratings. In contrast, the response of equity returns to lagged CDS returns during the postcrisis period is observed among firms across different credit rating categories; however, the magnitude of the response is higher among those with lower credit ratings.     

Limited arbitrage between equity and credit markets

We document that short-horizon pricing discrepancies across firms' equity and credit markets are common and that an economically significant proportion of these are anomalous, indicating a lack of integration between the two markets. Proposing a statistical measure of market integration, we investigate whether equity–credit market integration is related to impediments to arbitrage. We find that time variation in integration across a firm's equity and credit markets is related to firm-specific impediments to arbitrage such as liquidity in equity and credit markets and idiosyncratic risk. Our evidence provides a potential resolution to the puzzle of why Merton model hedge ratios match empirically observed stock-bond elasticities (Schaefer and Strebulaev, 2008) and yet the model is limited in its ability to explain the integration between equity and credit markets (Collin-Dufresne, Goldstein, and Martin, 2001).     

House prices, consumption, and monetary policy: a financial accelerator approach

We consider a general equilibrium model with frictions in credit markets used by households. In our economy, houses provide housing services to consumers and serve as collateral to lower borrowing cost. We show that this amplifies and propagates the effect of monetary policy shocks on housing investment, house prices and consumption. We also consider the effect of a structural change in credit markets that lowers the transaction costs of additional borrowing against housing equity. We show that such a change would increase the effect of monetary policy shocks on consumption, but would decrease the effect on house prices and housing investment.     

国内城市商业银行规模扩张篚路经分析及启示

制度产品供给的规模偏好、追求规模经济的成长动力、追求信贷规模扩张的收益最大化成为国内城市商业银行规模扩张的重要动力。通过分析可以发现，跨区域经营背景下的异地分支机构扩张及金融市场上的主动负债是城市商业银行规模扩张的两个重要途径。随着城市商业银行规模的增长，主动负债逐渐成为其重要资金来源。然而，一味追求规模扩张并不等于持续的价值创造，建立适应自身市场定位及战略目标的商业模式才是获取竞争优势的关键。     

Bad Times,Good Credit

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

Competition and Strategic Information Acquisition in Credit Markets

We investigate the interaction between banks’ use of informationacquisition as a strategic tool and their role in promotingthe efficiency of credit markets when a bank’s abilityto gather information varies with its distance to the borrower.We show that banks acquire proprietary information both to softenlending competition and to extend their market share. As competitionincreases, investments in information acquisition fall, leadingto lower interest rates but also to less efficient lending decisions.Consistent with the recent wave of bank acquisitions, we alsofind that merging for informational reasons with a competitoris an optimal response to industry consolidation.