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Chapter Fourteen

Part V The Financial Institutions Industry. Chapter Fourteen. THE THEORY OF FINANCIAL STRUCTURE. Corporate bond Commercial paper. Sources of External Finance in U.S. For nonfinancial business 1970-1985 1. 流量而非存量，所以股票部分有低估之嫌，而舉債有高估之嫌 2.股票部份未扣除庫藏，所以高估了. Government loans

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Chapter Fourteen

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  1. Part V The Financial Institutions Industry Chapter Fourteen THE THEORY OF FINANCIAL STRUCTURE

  2. Corporate bond Commercial paper Sources of External Finance in U.S For nonfinancial business 1970-1985 1.流量而非存量，所以股票部分有低估之嫌，而舉債有高估之嫌 2.股票部份未扣除庫藏，所以高估了 Government loans loans by foreigners Trade debt

  3. Sources of Foreign External Finance

  4. Puzzles of Financial Structure • 1. Stocks are not most important source of finance for businesses • 2. Issuing marketable securities not primary funding source for businesses • 3. Indirect finance (financial intermediation) is far more important than direct finance • 4. Banks are most important source of external finance • 5. Financial system is among most heavily regulated sectors of economy • 6. Only large, well established firms have access to securities markets • 7. Collateral is prevalent feature of debt contracts • 8. Debt contracts are typically extremely complicated legal documents with restrictive covenants

  5. Transactions Costs and Financial Structure • Transactions costs hinder flow of funds to people with productive investment opportunities • Financial intermediaries make profits by reducing transactions costs. How? • 1. Take advantage of economies of scale • Example: Mutual Funds、電腦科技的規模經濟性可大幅降低交易成本 • 2. Develop expertise to lower transactions costs • Explains Puzzle 3 降低交易成本的好處會反映在如：MMMF provides check writing (liquidity) service, 又如provide toll-free number, 上網交易

  6. Adverse Selection and Moral Hazard: Definitions • Adverse Selection: • 1. Before transaction occurs • 2. Potential borrowers most likely to produce adverse outcome are ones most likely to seek loan and be selected • Moral Hazard: • 1. After transaction occurs • 2. Hazard that borrower has incentives to engage in undesirable (immoral) activities making it more likely that won't pay loan back

  7. Adverse Selection and FinancialStructure • Lemons Problem in Securities Markets 1. If can't distinguish between good and bad securities, willing pay only average of good and bad securities’ value. 2. Result: Good securities undervalued and firms won't issue them; bad securities overvalued so too many issued. 3. Investors won't want buy bad securities, so market won't function well. Explains Puzzle 2 and Puzzle 1. Also explains Puzzle 6: Less asymmetric info for well known firms, so smaller lemons problem

  8. Tools to Help Solve Adverse Selection (Lemons) Problem 如S&P, Moody’s, Value line • 1. Private production and sale of information • Free-rider problem interferes with this solution • 2. Government regulation to increase information • Explains Puzzle 5 • 3. Financial intermediation A. Analogy to solution to lemons problem provided by used car dealers B. Avoid free-rider problem by making private loans • Explains Puzzles 3 and 4 • 4. Collateral and net worth • Explains Puzzle 7 Government 自已produce information或要求公司誠實report information 開發中國家的銀行比已開發國家重要 =A-L ∴最不需要錢的人往往是最能借到錢的人

  9. Moral Hazard: Debt Vs. Equity 5. Mgr compensation package 6.managerial labor market 7.market for corporate control 但最後仍有dead weight loss由股東承擔 • Moral Hazard in Equity: • Principal-Agent Problem 1. Result of separation of ownership by stockholders (principals) from control by managers (agents) 2. Managers act in own rather than stockholders' interest • Solutions to Principal-Agent Problem 1. Monitoring: production of information 2. Government regulation to increase information 3. Financial intermediation 4. Debt contracts • Explains Puzzle 1: Why debt used more than equity Mgr擁有的股權越少，他越有誘因不要努力工作，或越去浪費公帑於自己身上，或欺騙股東 但有free ride問題，老鼠替貓掛鈴鐺 如對詐欺重罰 如 V.C. 只要mgr的代理問題不要太嚴重，debt holder可忍受

  10. Moral Hazard and Debt Markets i.e.股東會要求mgr採用excessive risky investment • Moral hazard: borrower wants to take on too much risk – asset substitution hypothesis • Solutions • 1. Net worth • 2. Monitoring and enforcement of restrictive covenants • 3. Financial intermediation • Banks and other intermediaries have special advantages in monitoring • Explains Puzzles 1-4. Explains puzzle 8， 但這一點其實很難作到，且有free ride之問題，所以會有第三點的存在

  11. Financial Development and Economic Growth • Financial Repression Leads to Low Growth: Why? • 1. Poor legal system • 2. Weak accounting standards • 3. Government directs credit • 4. Financial institutions nationalized • 5. Inadequate government regulation • Financial Crises 低度開發的金融體系 使collateral 和 restrictive covenant 難生效 偏好某些產業，大公司 沒有incentive to solve A.S. 及MH

  12. Financial Development and Economic Growth • Factors Causing Financial Crises • 1. Increase in interest rates • 2. Increases in uncertainty • 3. Asset market effects on balance sheets • Decline in stock market affects net worth • Unanticipated deflation • Cash flow effects • 4. Bank panics • Domestic currency:A=D+S AD good borrower less willing to borrow AD because hard to screen ADMH A=D+SADMH X  i household and firm’s interest payment increase, 大家的CF∴償債能力∴ADMH X 外債  

  13. Events in U.S. Financial Crises

  14. Events in Mexican and East Asian Financial Crises

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