M15_MISH1438_06_IM_C15

M15_MISH1438_06_IM_C15 - Part V Fundamentals of Financial...

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Part V Fundamentals of Financial Institutions
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Chapter 15 Why Do Financial Institutions Exist? Basic Facts About Financial Structure Throughout the World Transaction Costs How Transaction Costs Influence Financial Structure How Financial Intermediaries Reduce Transaction Costs Asymmetric Information: Adverse Selection and Moral Hazard The Lemons Problem: How Adverse Selection Influences Financial Structure Lemons in the Stock and Bond Markets Tools to Help Solve Adverse Selection Problems Conflicts of Interest Box: The Enron Implosion How Moral Hazard Affects the Choice Between Debt and Equity Contracts Moral Hazard in Equity Contracts: The Principal-Agent Problem Conflicts of Interest Box: “Hollywood Accounting”: Was Forrest Gump a Money Loser? Tools to Help Solve the Principal-Agent Problem How Moral Hazard Influences Financial Structure in Debt Markets Tools to Help Solve Moral Hazard in Debt Contracts Summary Case : Financial Development and Economic Growth Case : Is China a Counter-Example to the Importance of Financial Development? Financial Crises and Aggregate Economic Activity Factors Causing Financial Crises Case : Financial Crises in the United States Mini-Case Box: Case Study of a Financial Crisis: The Great Depression Case : Financial Crises in Emerging-Market Countries: Mexico, 1994–1995, East Asia, 1997–1998, and Argentina 2001–2002 Overview and Teaching Tips The development of a new literature in finance on asymmetric information and financial structure in recent years, now enables financial institutions to be taught with basic principles rather than placing emphasis on a set of facts that students may find boring and so will forget after the final exam. This chapter provides an outline of this literature to the student and provides him or her with an understanding of why our financial system is structured the way it is. In addition it emphasizes the ideas of adverse selection and moral hazard, which are basic concepts that are useful in understanding conflicts of interest in Chapter 16, bank regulation in Chapter 20, principles of insurance management in Chapter 22, and principles of credit risk management in Chapter 24.
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86 Mishkin/Eakins • Financial Markets and Institutions, Sixth Edition The chapter begins with a discussion of eight basic facts about financial structure. Students find some of these facts to be quite surprising—the relative unimportance of the stock market as a source of financing investment activities, for example—which piques their interest and stimulates them to want to understand the economics behind our financial structure. The next two sections then solve these facts by providing an understanding of how transaction costs and asymmetric information affect financial structure. My experience with teaching this material is that it is very intuitive and so is easy for students to learn. Furthermore, students find the material inherently exciting because it explains phenomena that they know are important
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This note was uploaded on 10/17/2011 for the course ECON 317 taught by Professor Guidry during the Spring '11 term at Nicholls State.

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M15_MISH1438_06_IM_C15 - Part V Fundamentals of Financial...

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