Wang, Hung-Jen (2000): Symmetrical Information and Credit Rationing: Graphical Demonstrations. Published in: Financial Analysts Journal , Vol. 2, No. 56 (2000): pp. 85-95.
Download (526kB) | Preview
As this article shows, the pro-debtor U.S. Bankruptcy Code alone can cause credit rationing, even without asymmetrical information in the market, because the code entails substantial costs to lenders if borrowers file for bankruptcy. In the absence of bankruptcy cost, lenders are always justified in raising interest rates and clearing markets. If the bankruptcy cost is nontrivial, however, lenders' profits are concave in the relevant range of interest rates. Thus, lenders cannot always clear the market by using higher rates. The study reported here also found that the use of collateral in debt contracts can reduce rationing but that even 100 percent collateral does not eliminate all rationing possibilities. A positive relationship was found between credit risk and the amount of pledged collateral, which is not necessarily true with models based on asymmetrical information.
|Item Type:||MPRA Paper|
|Original Title:||Symmetrical Information and Credit Rationing: Graphical Demonstrations|
|Keywords:||Company Failures; Credit Control; Debt|
|Subjects:||E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E22 - Investment ; Capital ; Intangible Capital ; Capacity
G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill
C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C33 - Panel Data Models ; Spatio-temporal Models
|Depositing User:||Hung-Jen Wang|
|Date Deposited:||26. May 2011 06:10|
|Last Modified:||13. Feb 2013 19:00|
Behrens, R.H.1985. Commercial Loan Officer's Handbook. Boston, MA: Bankers Publishing.
Berger, A.N., and G.F. Udell. 1990. "Collateral, Loan Quality, and Bank Risk." Journal of Monetary Economics, vol. 25, no. 1 (january):21-42.
Besanko, D., and A. Thakor. 1987. "Collateral and Rationing: Sorting Equilibria in Monopolistic and Competitive Credit Markets." International Economic Review, vol. 28, no 3:671-689.
Bester, H.1985. "Screening vs. Rationing in Credit Markets with Imperfect Information." American Economic Review, vol. 75, no 4 (September):850-855.
Chan, Y., and G. Kanatas. 1985. "Asymmetrical Valuation and the Role of Collateral in Loan Agreements." Journal of Money, Credit and Banking, vol. 17, no. 1:84-95.
Eberhart, A.C., W.T. Moore, and R.L. Roenfeldt. 1990. "Security Pricing and Deviations from the Absolute Priority Rule in Bankruptcy Proceedings." Journal of Finance, vol. 45, no. 5 (December):1457-69.
Franks, J.R., and W.N. Torous. 1989. "An Empirical Investigation of U.S. Firms in Reorganization." Journal of Finance, vol. 44, no. 3 (July):747-770.
Gropp, R., J.K. Scholz, and M.J. White. 1997. "Personal Bankruptcy and Credit Supply and Demand." Quarterly Journal of Economics, vol. 112, no. 1 (February):217-251.
Kim, E.H.1978. "A Mean-Variance Theory of Optimal Capital Structure and Corporate Debt Capacity." Journal of Finance, vol. 33, no. 1 (March):45-64.
Longhofer, S.D.1997. "Absolute Priority Rule Violations, Credit Rationing, and Efficiency." Journal of Financial Intermediation, vol. 6, no. 3 July):249-267.
Scott, J.A., and T.C. Smith. 1986. "The Effect of the Bankruptcy Reform Act of 1978 on Small Business Loan Pricing." Journal of Financial Economics, vol. 16, no. 1 (April):119-140.
Stiglitz, J., and A. Weiss. 1981. "Credit Rationing in Markets with Imperfect Information." American Economic Review, vol. 71, no. 3 Uune):393-410.
—.1992. "Asymmetrical Information in Credit Markets and Its Implications for Macro-Economics." Oxford Economic Papers, vol. 44, no. 1:162-192.
Weiss, L.1990. "Bankruptcy Resolution: Direct Costs and Violation of Priority of Claims." Journal of Financial Economics, vol. 27, no. 2 (February):285-314.
—.1993. "The Bankruptcy Code and Violations of Absolute Priority." In The New Corporate Finance. Edited by D.H. Chew. New York: McGraw-Hill.
Williamson, S.D.1986. "Costly Monitoring, Financial Intermediation, and Equilibrium Credit Rationing." Journal of Monetary Economics, vol. 18, no. 2:159-179.
—.1987. "Costly Monitoring, Loan Contracts, and Equilibrium Credit Rationing." Quarterly Journal of Economics, vol. 102, no. 1 (February):135-146.