Agency Costs, Risk Management, and Capital Structure

What is the role of legal systems in financial intermediation? Theory and evidence

Credit markets generate more finance than equity markets, particularly in developing countries. In credit markets the central institution, again especially in developing countries, is the bank. In many such countries, directed lending, crony capitalism, and related lending are key problems. And since banks are corporations, self-dealing involving loans to shareholders, managers, and politically important people is added to the common forms of corporate governance issues. Initial efforts to analyze credit markets through the lens of legal origin had the shortcoming that the focus was on the law of bankruptcy rather than the law of secured credit. And even within the area of bankruptcy, the focus was on reorganization rather than liquidation, which is more common in both developed and developing countries. The law of secured credit is especially important in countries where mortgages on land are unavailable due to the absence of land titling. Secured credit law is often defective because of the absence of self-help remedies, especially in view of lengthy court delays. Legal origin may be important to the efficacy of creditors rights in developed countries, but there is evidence that it is an unimportant factor in developing countries. The assumption of commonalities within a legal family is doubtful in law pertaining to credit markets, as shown by the sharp differences between U.S. and U.K. bankruptcy law and the many differences in secured credit law found by the EBRD in the transition countries. Where, as in many developing countries, judiciaries are weak, the law of secured credit is especially important because bankruptcy proceedings are likely to be slow and undependable. In such countries credit registries may, by building on the concept of reputation, provide a partial substitute for judicial proceedings.

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Credit Markets, Creditors' Rights, and Economic Development

Strategic interaction between futures and spot markets

This paper presents an integrated overview of the literature linking institutions, financial development and economic growth. From the large body of research on institutional development, the paper first selects those contributions that make it possible to study the role of institutional arrangements in ameliorating/worsening the information frictions and transaction costs that characterize the development of financial markets. The paper then investigates the theoretical mechanisms by which these specific frictions affect economic growth and presents the stock of empirical evidence quantifying the impact of institutions on growth through financial development.

/pdf/from-institutions-to-financial-development-and-growth-what-2whpi4ivc3.pdf

From institutions to financial development and growth: what are the links?

We first review the existing theories on the implications of the various regulations that protect creditors. We then empirically investigate the cost and benefits of the strict protection of creditors` rights. Building on the sample of 49 countries developed by La Porta et al. (1998), we study the impact on debt volume, interest rates and default rates of both an aggregate measure of the degree of protection of creditor rights and efficiency of the judicial system. We confirm previous results showing that an effective judicial system is crucial for the development and optimal performance of the credit market. Yet, in contrast to previous studies, we find no conclusive evidence on the sign and magnitude of the effect of creditors` rights protection on credit market efficiency. Instead, macroeconomic stability appears to be crucial for the outgrowth of wide debt markets.

The Cost and Benefits of the Strict Protection of Creditor Rights: Theory and Evidence

El objeto de este articulo es proporcionar una panoramica de la estructura, funcionamiento y resultados del "mercado" de generacion electrica en Espana desde su desregulacion en 1998 hasta nuestros dias De forma mas precisa se repasa de forma sucinta la historia del proceso liberalizador; se describe la estructura del mercado y su evolucion en el tiempo; se realiza un analisis de la existencia de poder de mercado y se evaluan los resultados del proceso de liberalizacion, considerando su impacto sobre la eficiencia asignativa, productiva y dinamica del sistema El articulo concluye con un breve repaso a los recientes cambios regulatorios introducidos por el gobierno

El mercado de generación eléctrica en España: estructura, funcionamiento y resultados

We develop a model of a financially distressed firm to analyze the implications of a bank debt restructuring when the operational characteristics of the firm's project for the post-distress period are endogenously determined as part of the workout We establish a formal link between the debt restructuring and operational actions such as employee layoffs, and show how these actions are affected by the firm's capital structure, the ordering of absolute priorities, and the allocation of control rights and residual claims after reorganization Finally, we discuss the implications of our analysis for the design of reorganization law

Financial distress, bank debt restructurings, and layoffs

En este articulo, desarrollamos un modelo teorico para estudiar las implicaciones de la preferencia del credito salarial y de la actuacion de un fondo de garantia de salarios sobre la eficiencia de la reestructuracion financiera. De los resultados de este modelo se deducen claras recomendaciones de politica economica que afectan a ambas instituciones legales.

Privilegio Salarial y Reestructuración Financiera: El Papel Del Fondo De Garantía Salarial

We examine the employment decisions of Spanish manufacturing firms in financial distress. Our sample comprises 4,566 firms operating during 1983-1994. We find that firms in distress reduce their employment significantly. These reductions are positively associated with asset sales, but cannot be fully explained by them. They are also negatively related to firm size and to firing costs. Our main finding, however, is that firms that restructure their debt in response to distress are more likely to reduce their employment. Employment falls as the firm's debt exposure is reduced, but also as a consequence of a bank debt restructuring involving exclusively an extension of maturity. These empirical findings provide a clear-cut quantitative illustration of the agency costs of debt emerging from stockholder-bondholder conflicts.

Conflicts of Interest, Employment Decisions, and Debt Structuring: Evidence from Spanish Firms in Financial Distress

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