Signaling in Credit Markets

Milde, Hellmuth; Riley, John G.

doi:10.2307/1882644

Cited by 140 publications

(89 citation statements)

References 14 publications

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“…This follows from the comparison of equations (22) and (23). Equation (22) implies that variable capital always reacts to both positive and negative productivity shocks. Constraint (2) instead implies that, after a negative productivity shock at time t, k t+1 cannot be reduced below (1 − δ k ) k t , and as a consequence…”

Section: Solution With the Irreversibility Constraint Onlymentioning

confidence: 97%

Financing constraints, irreversibility, and investment dynamics

Caggese

2007

Journal of Monetary Economics

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We develop a model of an industry with many heterogeneous firms that face both financing constraints and irreversibility constraints. The financing constraint implies that firms cannot borrow unless the debt is secured by collateral; the irreversibility constraint that they can only sell their fixed capital by selling their business. We use this model to examine the cyclical behavior of aggregate fixed investment, variable capital investment, and output in the presence of persistent idiosyncratic and aggregate shocks. Our model yields three main results. First, the effect of the irreversibility constraint on fixed capital investment is reinforced by the financing constraint. Second, the effect of the financing constraint on variable capital investment is reinforced by the irreversibility constraint. Finally, the interaction between the two constraints is key for explaining why input inventories and material deliveries of US manufacturing firms are so volatile and procyclical, and also why they are highly asymmetrical over the business cycle.JEL classification: D21, E22, E32, G31

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Section: Solution With the Irreversibility Constraint Onlymentioning

confidence: 97%

Financing constraints, irreversibility, and investment dynamics

Caggese

2007

Journal of Monetary Economics

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“…Concerning the loan size-loan interest rate relationship, it is commonly argued that loans of a larger size carry lower interest rates, given that larger loans incur lower transaction costs in lending. In contrast, Midle and Riley (1988) predict a positive relationship between loan size and loan interest rates.…”

Section: Relationship Lending Hypothesismentioning

confidence: 79%

“…Here it should be noted that the loan size may also be considered as an endogenous variable in line with the theoretical implication by Midle and Riley (1988). In their model, loan size can play a signalling role and banks screen by offering larger loans at higher interest rates.…”

Section: Relationship Lending Hypothesismentioning

confidence: 86%

“…There is a growing theoretical literature on loan contract design that focuses on the interdependencies of the loan terms (Merton 1974;Myers 1977;Smith and Warner 1979;Bester 1985;Flannery 1986;Chan and Thakor 1987;Midle and Riley 1988;Boot et al 1991;Diamond 1993;Pozzolo 2002). The various theories used to explain the debt contract design, however, do not give unambiguous answers as to the relationships between the different loan terms specified in a debt contract.…”

Section: Introductionmentioning

confidence: 99%

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The Determinants of Loan Contracts to Business Firms: Empirical Evidence from a Private Bank in Vietnam

Lensink¹,

Pham²

2008

Domestic Resource Mobilization and Financial Development

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This paper deals with loan contracting from a private bank in Vietnam. We focus on the main loan contract features that the bank uses in lending to business firms, namely loan maturity, collateral and loan interest rate. Based upon the simultaneous equation model of Dennis et al. (2000) and the bank's loan contracting policies, we examine the possible interdependency of the three different loan contract terms. Also, we try to determine which firm characteristics and exogenous factors are relevant for loan contracts. We find strong interdependencies between these contract terms with significant bi-directional relationships between collateral and loan maturity, loan rate and loan maturity, and a uni-directional relationship between loan rate and collateral. The conflicting signs within the collateral-loan maturity relationship and the loan interest rate-loan maturity relationship can be explained by our hypothesis that the choice for a certain loan maturity is primarily determined by borrowers' behaviors, whereas the loan rate and the collateral requirements are primarily determined by banks policies. In addition, our results support the relevance of firm quality, agency costs of debt and relationship lending in loan contract design.

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“…Sharpe (1990) refers to this type of asymmetries when he underlines that the establishment of long--term "customer relationships" between individual banks and specific groups of borrowers can imply that the latter are "informationally captured" by the former. However, as in the case of information asymmetries which have been examined by various models on credit rationing (see Stiglitz--Weiss 1981, 1992Milde--Riley 1988), Sharpe's model is centered on the relationships between the individual bank and its different borrowers. Hence, when firms are "informationally captured" by a given bank, the impact of the information asymmetry between this bank and its borrowers decreases.…”

Section: Conclusion: Banks As Social Accountantsmentioning

confidence: 99%

A Schumpeterian analysis of the credit market

Messori¹

2014

Structural Change and Economic Dynamics

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Signaling in Credit Markets

Cited by 140 publications

References 14 publications

Financing constraints, irreversibility, and investment dynamics

Financing constraints, irreversibility, and investment dynamics

The Determinants of Loan Contracts to Business Firms: Empirical Evidence from a Private Bank in Vietnam

A Schumpeterian analysis of the credit market

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