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1、Chapter 8,An Economic Analysis of Financial Structure,Sources of External Finance in U.S,FIGURE 1 Sources of External Funds for Nonfinancial Businesses: A Comparison of the United States with Germany, Japan, and Canada,Source: Andreas Hackethal and Reinhard H. Schmidt, “Financing Patterns: Measureme
2、nt Concepts and Empirical Results,” Johann Wolfgang Goethe-Universitat Working Paper No. 125, January 2004. The data are from 19702000 and are gross flows as percentage of the total, not including trade and other credit data, which are not available.,8.1 Eight Basic Facts,Stocks are not the most imp
3、ortant sources of external financing for businessesIssuing marketable debt and equity securities is not the primary way in which businesses finance their operationsIndirect finance is many times more important than direct financeFinancial intermediaries, particularly banks, are the most important so
4、urce of external funds used to finance businesses.,Eight Basic Facts (contd),The financial system is among the most heavily regulated sectors of the economyOnly large, well-established corporations have easy access to securities markets to finance their activitiesCollateral is a prevalent feature of
5、 debt contracts for both households and businesses. Debt contracts are extremely complicated legal documents that place substantial restrictive covenants on borrowers,8.2 Transaction Costs and Financial Structure,Transaction costs hinder flow of funds to people with productive investment opportuniti
6、esFinancial intermediaries make profits by reducing transaction costs1.Take advantage of economies of scaleExample: Mutual Funds2.Develop expertise to lower transaction costsExplains Fact 3,8.3 Asymmetric Information,Adverse Selection:1.Before transaction occurs2.Potential borrowers most likely to p
7、roduce adverse outcomes are ones most likely to seek loans and be selectedMoral Hazard:1.After transaction occurs2.Hazard that borrower has incentives to engage in undesirable (immoral) activities making it more likely that wont pay loan backAgency theory analyses how asymmetric information problems
8、 affect economic behavior,8.4 Adverse Selection and Financial Structure,8.4.1 Lemons Problem in Securities Markets1.If cant distinguish between good and bad securities, willing to pay only average of good and bad securities values.2.Result: Good securities undervalued and firms wont issue them; bad
9、securities overvalued, so too many issued.3.Investors wont want to buy bad securities, so market wont function well.Explains Fact 2 and Fact 1.Also explains Fact 6: Less asymmetric information for well known firms, so smaller lemons problem,8.4.2 Tools to Help Solve Adverse Selection Problem,1.Priva
10、te Production and Sale of InformationFree-rider problem interferes with this solution2.Government Regulation to Increase InformationExplains Fact 53.Financial IntermediationA.Analogy to solution to lemons problem provided by used-car dealersB.Avoid free-rider problem by making private loansExplains
11、Fact 3 and 4,4.Collateral and Net Worth- Collateral, property promised to the lender if the borrower defaults, reduces the consequences of adverse selection because it reduces the lenders losses in the event of a default. Explains Fact 7-Net worth, the difference between a firms assets and its liabi
12、lities, can perform a similar role to collateral.“Only the people who dont need money can borrow it!”,8.5 Moral Hazard in Equity Contracts,Called the Principal-Agent ProblemPrincipal: less information (stockholder)Agent: more information (manager)Separation of ownership and control of the firmManage
13、rs pursue personal benefits and power rather than the profitability of the firm,Principal-Agent Problem: Solutions,Monitoring: production of information But the monitoring process can be expensive in terms of time and money.And the free-rider problem decreases the amount of information production.2.
14、 Government regulation to increase informationExplains Fact 5Government have laws to force firms to adhere to standard accounting principles that make profit verification easier. They also pass laws to impose stiff criminal penalties on people who commit the fraud of hiding and stealing profits.Part
15、ly effective.,Financial intermediationExplains Fact 3Venture capital firm can helps reduce the moral hazard.Debt contractsMoral hazard arises with an equity contract.For debt contracts, only when the firm cannot meet its debt payments, is there a need for the lender to verify the state of the firms
16、profits.Explains Fact 1: Why debt used more than equity,8.6 Moral Hazard in Debt Markets,Moral hazard: borrower wants to take on too much riskTools to Help Solve Moral HazardNet worth and collateralMake the debt contract incentive-compatible.Monitoring and enforcement of restrictive covenantsCovenan
17、ts to discourage undesirable behavior. Covenants to encourage desirable behavior. Covenants to keep collateral valuable Covenants to provide information,Moral Hazard: Solutions,3.Financial intermediationBanks and other intermediaries have special advantages in monitoringExplains Fact 3,4.,Summary Ta
18、ble 1 Asymmetric Information Problems and Tools to Solve Them,8.7 Conflicts of Interest,Type of moral hazard problem caused by economies of scope (applying one information resource to many different services). Arise when an institution has multiple objectives and, as a result, has conflicts between
19、those objectivesA reduction in the quality of information in financial markets increases asymmetric information problemsFinancial markets do not channel funds into productive investment opportunities,Asymmetric Information in Transition and Developing Countries.,“Financial repression” created by an
20、institutional environment characterized by:Poor system of property rights (unable to use collateral efficiently)Poor legal system (difficult for lenders to enforce restrictive covenants)Weak accounting standards (less access to good information)Government intervention through directed credit programs and state owned banks (less incentive to proper channel funds to its most productive use).,
