金融市場與金融機(jī)構(gòu)英文課件-(7)

1、Chapter PreviewA vibrant economy requires a financial system that moves funds from savers to borrowers. But how does it ensure that your hard-earned dollars are used by those with the best productive investment opportunities?Chapter PreviewIn this chapter, we take a closer look at why financial inst

2、itutions exist and how they promote economic efficiency. Topics include:Basic Facts About Financial Structure Throughout the WorldTransaction CostsAsymmetric Information: Adverse Selection and Moral HazardChapter Preview (cont.)The Lemons Problem: How Adverse Selection Influences Financial Structure

3、How Moral Hazard Affects the Choice Between Debt and Equity ContractsHow Moral Hazard Influences Financial Structure in Debt MarketsConflicts of InterestBasic Facts About Financial Structure Throughout the WorldThe financial system is a complex structure including many different financial institutio

4、ns: banks, insurance companies, mutual funds, stock and bonds markets, etc.Basic Facts About Financial Structure Throughout the WorldThe chart on the next slide how nonfinancial business attain external funding in the U.S., Germany, Japan, and Canada. Notice that, although many aspects of these coun

5、tries are quite different, the sources of financing are somewhat consistent, with the U.S. being different in its focus on debt.Sources of Foreign External Finance Facts of Financial StructureStocks are not the most important source of external financing for businesses.Issuing marketable debt and eq

6、uity securities is not the primary way in which businesses finance their operations.Facts of Financial StructureIndirect finance, which involves the activities of financial intermediaries, is many times more important than direct finance, in which businesses raise funds directly from lenders in fina

7、ncial markets.Financial intermediaries, particularly banks, are the most important source of external funds used to finance businesses.Facts of Financial StructureThe financial system is among the most heavily regulated sectors of economy.Only large, well-established corporations have easy access to

8、 securities markets to finance their activities.Facts of Financial StructureCollateral is a prevalent feature of debt contracts for both households and businesses.Debt contracts are typically extremely complicated legal documents that place substantial restrictions on the behavior of the borrowers.T

9、ransaction CostsTransactions costs influence financial structureE.g., a $5,000 investment only allows you to purchase 100 shares $50 / share (equity)No diversificationBonds even worsemost have a $1,000 sizeIn sum, transactions costs can hinder flow of funds to people with productive investment oppor

10、tunitiesTransaction CostsFinancial intermediaries make profits by reducing transactions costs Take advantage of economies of scale (example: mutual funds)Develop expertise to lower transactions costsAlso provides investors with liquidity, which explains Fact # 3 (slide 7-9)Asymmetric Information: Ad

11、verse Selection and Moral HazardIn your introductory finance course, you probably assumed a world of symmetric informationthe case where all parties to a transaction or contract have the same information, be that little or a lotIn many situations, this is not the case. We refer to this as asymmetric

12、 information.Asymmetric Information: Adverse Selection and Moral HazardAsymmetric information can take on many forms, and is quite complicated. However, to begin to understand the implications of asymmetric information, we will focus on two specific forms:Adverse selectionMoral hazardAsymmetric Info

13、rmation: Adverse Selection and Moral HazardAdverse SelectionOccurs when one party in a transaction has better information than the other partyBefore transaction occursPotential borrowers most likely to produce adverse outcome are ones most likely to seek loan and be selectedAsymmetric Information: A

14、dverse Selection and Moral HazardMoral HazardOccurs when one party has an incentive to behave differently once an agreement is made between partiesAfter transaction occursHazard that borrower has incentives to engage in undesirable (immoral) activities making it more likely that wont pay loan backAs

15、ymmetric Information: Adverse Selection and Moral HazardThe analysis of how asymmetric information problems affect behavior is known as agency theory. We will now use these ideas of adverse selection and moral hazard to explain how they influence financial structure.The Lemons Problem: How Adverse S

16、election Influences Financial StructureLemons Problem in Used CarsIf we cant distinguish between “good” and “bad” (lemons) used cars, we are willing pay only an average of good and bad car valuesResult: Good cars wont be sold, and the used car market will function inefficiently.What helps us avoid t

17、his problem with used cars?Lemons Problem in Securities MarketsIf we cant distinguish between good and bad securities, willing pay only average of good and bad securities valueResult: Good securities undervalued and firms wont issue them; bad securities overvalued so too many issuedThe Lemons Proble

18、m: How Adverse Selection Influences Financial StructureLemons Problem in Securities MarketsInvestors wont want buy bad securities, so market wont function wellExplains Fact # 1 and # 2 (slide 78)Also explains Fact # 6 (slide 710): Less asymmetric info for well known firms, so smaller lemons problemT

19、he Lemons Problem: How Adverse Selection Influences Financial StructureTools to Help Solve Adverse Selection (Lemons) ProblemsPrivate Production and Sale of InformationFree-rider problem interferes with this solutionGovernment Regulation to Increase Information (explains Fact # 5, slide 710)For exam

20、ple, annual audits of public corporations (although Ernon is a shining example of why this does not eliminate the problemwell discuss that briefly)Tools to Help Solve Adverse Selection (Lemons) ProblemsFinancial IntermediationAnalogy to solution to lemons problem provided by used car dealersAvoid fr

21、ee-rider problem by making private loans (explains Fact # 3 and # 4, slide 79)Also explains fact #6large firms are more likely to use direct instead of indirect financingTools to Help Solve Adverse Selection (Lemons) ProblemsCollateral and Net Worth Explains Fact # 7, slide 7-11The Enron ImplosionUp

22、 to 2001, Enron appeared to be a very successful firm engaged in energy trading.It appears, however, that the firm had severe financial problems, but hid many of its problems in complex financial structures that allowed Enron to not report them.Even though Enron regularly filed records with the SEC,

23、 the problem was not prevented.The Enron ImplosionEven worse, its auditor Arthur Andersen eventually plead guilty to obstruction of justice charges. With that plea, one the largest and trusted auditors closed its doors forever.How Moral Hazard Affects the Choice Between Debt and Equity ContractsMora

24、l Hazard in Equity Contracts: the Principal-Agent ProblemResult of separation of ownership by stockholders (principals) from control by managers (agents)Managers act in own rather than stockholders interestHow Moral Hazard Affects the Choice Between Debt and Equity ContractsAn example of this proble

25、m is useful. Suppose you become a silent partner in an ice cream store, providing 90% of the equity capital ($9,000). The other owner, Steve, provides the remaining $1,000 and will act as the manager. If Steve works hard, the store will make $50,000 after expenses, and you are entitled to $45,000 of

26、 it.How Moral Hazard Affects the Choice Between Debt and Equity ContractsHowever, Steve doesnt really value the $5,000 (his part), so he goes to the beach, relaxes, and even spends some of the “profit” on art for his office. How do you, as a 90% owner, give Steve the proper incentives to work hard?H

27、ow Moral Hazard Affects the Choice Between Debt and Equity ContractsTolls to Help Solve the Principal-Agent ProblemProduction of Information: MonitoringGovernment Regulation to Increase InformationFinancial Intermediation (e.g, venture capital)Debt ContractsExplains Fact # 1, slide 78: Why debt is u

28、sed more than equityHow Moral Hazard Influences Financial Structure in Debt MarketsEven with the advantages just described, debt is still subject to moral hazard. In fact, debt may create an incentive to take on very risky projects. This is important to understand. Lets looks at a simple example.How

29、 Moral Hazard Influences Financial Structure in Debt MarketsMost debt contracts require the borrower to pay a fixed amount (interest) and keep any cash flow above this amount.For example, what if a firm owes $100 in interest, but only has $90? It is essentially bankrupt. The firm “has nothing to los

30、e” by looking for “risky” projects to raise the needed cash.How Moral Hazard Influences Financial Structure in Debt MarketsTools to Help Solve Moral Hazard in Debt ContractsNet Worth and CollateralMonitoring and Enforcement of Restrictive Covenants. Examples are covenants that discourage undesirable

31、 behaviorencourage desirable behaviorkeep collateral valuableprovide informationHow Moral Hazard Influences Financial Structure in Debt MarketsTools to Help Solve Moral Hazard in Debt ContractsFinancial Intermediationbanks and other intermediaries have special advantages in monitoringExplains Facts

32、# 14, slides 78 & 79Asymmetric Information Problems and Tools to Solve ThemCase: Financial Development and Economic GrowthFinancial repression leads to low growthWhy?Poor legal systemWeak accounting standards Government directs credit (state-owned banks)Financial institutions nationalizedInadequate

33、government regulationFinancial CrisesMini-Case: Should We Kill Allthe Lawyers?Lawyers are an easy target as a cause of problems. Shakespeares character Dick the Butcher quips, “l(fā)ets kill all the lawyers.” Is he right?Most legal work is about contract enforcement.Establish and maintain important prop

34、erty rightsWithout such rights, limited investments!The US has more lawyers / capita than any nation. Arguably the richest as well. Coincidence?Financial Crises and Aggregate Economic ActivityOur analysis of the affects of adverse selection and moral hazard can also assist us in understanding financ

35、ial crises, major disruptions in financial markets. Then end result of most financial crises in the inability of markets to channel funds from savers to productive investment opportunities.Is China a Counter-example?Even with its booming economy, Chinas financial development is still in an early sta

36、ge.Per capital income is around $5,000, but savings are around 40%, allowing China to build up capital stock as labor moves out of subsistence agriculture.However, this is unlikely to work for long.Is China a Counter-example?Russia in the 1950s had a similar economy, and few would argue that modern

37、Russia is a success story.To continue its growth, China needs to allocate capital more efficiently. Many of the financial repression problems we outlined are being addressed by Chinese authorities today.Conflicts of InterestConflicts of interest are a type of moral hazard that occurs when a person o

38、r institution has multiple interests, and serving one interest is detrimental to the other.Three classic conflicts developed in financial institutions. Looking at these closely offers insight in avoiding these conflicts in the future.Conflicts of Interest: Underwriting and Research in Investment Ban

39、kingInvestment banks may both research companies with public securities, as well as underwrite securities for companies for sale to the public.Research is expected to be unbiased and accurate, reflecting the facts about the firm. It is used by the public to form investment choices.Underwriters will

40、have an easier time if research is positive. Underwriters can better serve the firm going public if the firms outlook is optimistic.Conflicts of Interest: Underwriting and Research in Investment BankingResearch is expected to be unbiased and accurate, reflecting facts about the firm. It is used by t

41、he public to form investment choices.Underwriters can command a better price for securities issued by a firm if the firms outlook is optimistic.An investment bank acting as both a researcher and underwriter of securities for companies clearly has a conflictserve the interest of the issuing firm or t

42、he public?Conflicts of Interest: Underwriting and Research in Investment BankingDuring the tech boom, research reports were clearly distorted to please issuers. Firms with no hope of ever earning a profit received favorable research.This also lead to spinning, where underpriced equity was allocated

43、to executives who would promise future business to the investment bank. Conflicts of Interest: Auditing and Consulting in Accounting FirmsAuditors check the assets and books of a firm for the quality and accuracy of the information. The objective in an unbiased opinion of the firms financial health.

44、Consultants, for a fee, help firms with variety of managerial, strategic, and operational projects.An auditor acting as both an auditor and consultant for a firm clearly is not objective, especially if the consulting fees exceed the auditing fees.Conflicts of Interest: Auditing and Consulting in Acc

45、ounting FirmsThe case of Arthur Andersen, of course, epitomizes this conflict. A myriad of conflicts with its client Enron resulted in the eventual demise of Arthur Andersen when Enron collapsed. You can read further about that incident in the Mini-case box on page 197.Conflicts of Interest: Credit

46、Assessment and Consulting in Rating AgenciesRating agencies assign a credit rating to a security issuance of a firm based on projected cash flow, assets pledged, etc. The rating helps determine the riskiness of a security.Consultants, for a fee, help firms with variety of managerial, strategic, and

47、operational projects.An rating agency acting as both an rater and consultant for a firm clearly is not objective, especially if the consulting fees exceed the rating fees.Conflicts of Interest: Credit Assessment and Consulting in Rating AgenciesRating agencies, such as Moodys and Standard and Poor,

48、were caught in this game during the housing bubble. Firms asked the rater to help structure debt offering to attain the highest rating possible. When the debt subsequently defaulted, it was difficult for the agency to justify the original high rating. Perhaps it was just error. But few believe thatm

49、ost see the rating agencies as being blinded by high consulting fees.The details of this scandal appear in the Mini-Case on page 198. In short, the SEC stepped in and proposed new regulation. For example, a rating agency can no longer rate a security that they helped structure. But the steps go furt

50、her, creating a real regulatory reporting hassle for these firms.You should read both of these Mini-Cases. You will see these conflicts arise again as memory of these conflicts fades with time.Conflicts of Interest: Credit Assessment and Consulting in Rating AgenciesRemedies?Aside from the two Mini-

51、Cases, has much been done to remedy conflicts? Yes.Sarbanes-Oxley Act of 2002Established an oversight board to supervise accounting firmsIncreased the SECs budget for supervisory activitiesLimited consulting relationships between auditors and firmsEnhanced criminal charges for obstructionImproved th

52、e quality of the financial statements and boardRemedies?Aside from the two Mini-Cases, has much been done to remedy conflicts? Yes.Global Legal Settlement of 2002Required investment banks to sever links between research and underwritingSpinning is explicitly bannedImposed a $1.4 billion fineAdded ad

53、ditional requirements to ensure independence and objectivity of research reportsRemedies?Will these work?Its too early to determine yet.However, there is much criticism over the cost involved with these separations. In other words, financial institutions can no longer take advantage of the economies of scope gained from relationships.Some have argued that Sarbanes-Oxley has negatively i