Abstract not found

This article designs a framework for evaluating the causes, consequences, and future implications of financial services industry consolidation, reviews the extant research literature within the context of this framework (over 250 references), and suggests fruitful avenues for future research. The evidence is consistent with increases in market power from some types of consolidation; improvements in profit efficiency and diversification of risks, but little or no cost efficiency improvements on average; relatively little effect on the availability of services to small customers; potential improvements in payments system efficiency; and potential costs on the financial system from increasing systemic risk or expanding the financial safety net. JEL classification codes: G21, G28, G34, E58, L89 Key words: Banks, Mergers, Payments, Small business The opinions expressed do not necessarily reflect those of the Federal Reserve Board, the New York Reserve Bank, or their staffs. We thank Bob ...

Chicago, IL 60637 or e-mail at per.stromberg@gsb.uchicago.edu. There is a large academic literature on the principal-agent problem in financial contracting. 1 This literature focuses on the conflicts of interest between an agent, who is an entrepreneur with a venture that needs financing, and a principal, who is the investor providing the funds for the venture. Theory has identified a number of ways that the investor / principal can mitigate these conflicts. First, the investor can structure financial contracts, i.e. the allocation of cash flow and control rights, between the entrepreneur and investor to provide incentives for the entrepreneur to behave optimally. Second, the investor can engage in information collection before deciding whether to invest, in order to screen out ex ante unprofitable projects and bad entrepreneurs. And third, the investor can engage in information collection and monitoring once the project is under way. Despite the large volume of theory, empirical work has lagged behind in comparing the contracts and actions of real world principals to their counterparts in financial contracting theory. In this paper, we describe recent empirical work and its relation to theory for one prominent class of such principals – venture capitalists (VCs). In our view, VCs are real world entities that

I argue that an important friction in the issuance of financial securities is that potential investors may be privately informed about the value of the underlying assets. I show how security design can help overcome this friction. In the single asset case, I show that debt is often an optimal security when the number of potential investors is small, while equity becomes optimal as the degree of competition increases. In the multiple asset case, debt backed by a pool of assets is optimal if the number of assets is large relative to the degree of competition, while equity backed by individual assets is optimal when the number of assets is small relative to the degree of competition. I use the theory to interpret security design choices in financial markets. I thank Nicholas Barberis and Per Stromberg for helpful comments. 1.

We develop a model of informed finance that explains the key qualitative and quantitative features of informed venture capital finance in the United States. We show that the two key features of our model— potential investors are better judges than entrepreneurs of a project’s economic viability and projects require both significant external funding and entrepreneurial inputs—give rise to under-financing with equity and over-financing with debt. We then take the model to the data. Using only four model parameters we match: (1) the venture capitalist’s equity share; (2) the venture capitalist’s expected return and (3) its standard deviation; (4) the probability that a project receives funding; and (5) the probability the venture capitalist loses money on an investment. Our estimated parameters reveal the average quality of an unfunded project; the percentage of uncertainty resolved by the venture capitalists investigation; the percentage of total surplus accruing to the venture capitalist, and the magnitude of underfinancing associated with venture capital finance.

We examine the economics of financing small business in private equity and debt markets. Firms are viewed through a financial growth cycle paradigm in which different capital structures are optimal at different points in the cycle. We show the sources of small business finance, and how capital structure varies with firm size and age. The interconnectedness of small firm finance is discussed along with the impact of the macroeconomic environment. We also analyze a number of research and policy issues, review the literature, and suggest topics for future research.

This paper investigates the internal versus external financing decisions among 1900 early stage privately held UK firms in 1996-1997. We study the factors that affect rejection rates in applications for outside finance among the different types of investors, taking into account the non-randomness in a firm’s decision to seek outside finance. The data support the traditional pecking order theory; firms with greater capital expenditures / profits are more likely to seek finance and apply for more external finance. The data further indicate growth oriented firms are much more likely to apply for external finance. There are some differences in the internal versus external financing of female and male founder CEO firms, but these differences are largely attributable to growth orientation. Firms in industries with a greater proportion of larger competitors are less likely to obtain all of their desired outside capital. The data also indicate banks are less likely to finance completely new startups, while venture capital funds are more likely to finance innovative and growth orientated firms. Overall, the data

a model of lazy banks Michael Manove ∗ A. Jorge Padilla∗ ∗ and Marco Pagano∗∗ ∗ Many economists argue that the primary economic function of banks is to provide cheap credit, and to facilitate this function, they advocate the strict protection of creditor rights. But banks can serve another important economic function: by screening projects they can reduce the number of project failures and thus mitigate their private and social costs. In this article we show that because of market imperfections in the banking industry, strong creditor protection may lead to market equilibria in which cheap credit is inappropriately emphasized over project screening. Restrictions on collateral requirements and the protection of debtors in bankruptcy may redress this imbalance and increase credit-market efficiency. 1.

of the literature This review assesses the academic literature of recent years on the financing issues faced by technology-based small firms (TBSFs). It was produced as part of the latest report on these firms by the Bank’s Domestic Finance Division, published last month. (1) This report finds that, while there may still be market weaknesses in the provision of relatively small amounts of risk capital to TBSFs at the start-up and early stages, these appear to be less than four or five years ago, and to impact on TBSFs less than was the case then. Peter Brierley, Head of Domestic Finance Division, explains why the literature suggests that market imperfections in the provision of finance to small companies may apply with particular force to the start-up and early-stage financing of TBSFs, but concludes that there is little compelling evidence of a major market failure.

Angel financing is one of the most common, but least studied methods, to finance new ventures. In this paper, I propose a model to explain angel behavior. I use a unique dataset of angel-backed firms to test the predictions of the model and examine the characteristics of angel financing. Although they are exposed to greater uncertainty by investing earlier in the life of a firm compared to venture capital, angel investors do not rely on traditional control mechanisms such as board control, staging, or contractual provisions to protect against expropriation. Instead, angels reduce expected agency costs by forcing entrepreneurs to hold a larger stake in the firm, thereby aligning the interests of the entrepreneur with the outcome of the firm. In addition, angels use more informal methods such as investing in close geographic proximity and syndicating investments with other angels to mitigate risks.