Chapter8 - An Economic Analysis of Financial Structure...

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An Economic Analysis of  An Economic Analysis of  Financial Structure Financial Structure Mishkin Chapter 8 Mishkin Chapter 8 ECON 311 ECON 311 Elif AKBOSTANCI Elif AKBOSTANCI
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Econ 311 2 Basic Facts about the Financial Structure 1. Stocks are not the most  important source of  external financing  2. Issuing marketable debt and equity securities  is not the primary source of finance 3. Indirect finance is more important than direct  finance Indirect finance: involves activities of financial  intermediaries Direct finance: borrowers raise funds directly  from lenders in financial markets
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Econ 311 3 1. Financial intermediaries, particularly banks  are the most important source of external  funds used to finance businesses. Banks play an even more important role in the  financial system in the developing countries than  they do in the industrialized countries. In the industrialized countries although banks  remain important their shares of external funds   have been declining in recent years.
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Econ 311 4
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Econ 311 5 Turkish Case
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Econ 311 6 1. The financial system is among the most  heavily regulated sectors of the  economy. 2. Only large, well established   corporations have easy access to  securities markets to finance their  activities. 3. Collateral is a common feature of debt  contracts for both households and  businesses. Collateral is a property that is pledged to a lender  to guarantee payment in the event that the  borrower is unable to make debt payments.
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Econ 311 7 Secured debt  collateralized (mortgages, car loans  etc) Unsecured debt  not collateralized (like credit card  debt) 1. Debt contracts typically are extremely  complicated legal documents that place  substantial restrictions on the behavior of the  borrower. Restrictive covenants: in most cases bond or loan  contracts are documents with provisions  that restrict  and specify certain activities that the borrower can  engage in
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Econ 311 8 Asymmetric Information Adverse Selection : Potential bad credit risks  are the ones who most actively seek out loans.  Occurs before the transaction. – Lemons problem Moral Hazard : The lenders run the risk  that  the borrower  will engage in activities that are  risky and undesirable, so that they’ll make it  less likely  that the loan will be repaid. Occurs  after the transaction. – Principal agent problem
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Econ 311 9 Adverse Selection and The Lemons  Problem George Akerlof a Nobel Laureate defined the  ‘lemons problem’ as an adverse selection  problem interfering with the efficient  functioning of a market. The name comes  from the used car market where the potential 
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Chapter8 - An Economic Analysis of Financial Structure...

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