WWW.DIS.XLIBX.INFO
FREE ELECTRONIC LIBRARY - Thesis, dissertations, books
 
<< HOME
CONTACTS



Pages:   || 2 | 3 | 4 |

«Abstract We investigate the effects of a credit crunch in an economy where firms can operate a mature technology or restructure their activity and ...»

-- [ Page 1 ] --

Credit Crunches, Asset Prices and Technological Change

Raoul Minetti∗

Luis Araujo

Michigan State University Michigan State University

This Draft: May 2011

Abstract

We investigate the effects of a credit crunch in an economy where firms can operate a mature

technology or restructure their activity and adopt a new technology. We show that firms’ collateral and credit relationships ease firms’ access to credit and investment but can also inhibit

firms’ restructuring. When this occurs, a negative collateral shock and the resulting drop in the price of collateral assets squeeze collateral-poor firms out of the credit market but foster the restructuring of collateral-rich firms. We characterize conditions under which such an increase in firms’ restructuring occurs within existing credit relationships or through their breakdown. The analysis reveals that the credit and asset market policies adopted during the recent credit crunch can promote investment but might also slow down a process of Shumpeterian restructuring in the credit market.

Keywords: Aggregate Restructuring, Collateral, Credit Relationships, Credit Crunch.

JEL Codes: E44.

1 Introduction In the last two decades or so, a rich literature has investigated the role of credit in entrepreneurs’ investment decisions. In particular, a consensus has formed about the benefits that two key features of the credit market, entrepreneurs’ collateral and credit relationships, have for investment. When entrepreneurs have limited ability to commit to repay their lenders, the availability of pledgeable assets eases their access to credit.

Lenders can repossess collateral and this may compensate for the limited pledgeability of output. Lenders can also deter entrepreneurs’ misbehavior by threatening to repossess collateral. Credit relationships enhance these benefits of collateral. For example, lenders who have established close relationships with entrepreneurs can better monitor their collateral and, hence, obtain more value from its repossession. In an aggregate perspective, an implication of this view is that shocks that erode the value of collateral or break credit relationships can depress investment by hindering entrepreneurs’ access to financing.

This view of the credit market is generally confined to technologically static economies. If one allows for technological progress, two questions arise naturally: Do collateral and credit relationships ease entrepreneurs’ restructuring activity, meant as the upgrade from mature technologies to new ones? And therefore, in an aggregate perspective, do shocks that erode the value of collateral and break credit relationships depress aggregate restructuring as they allegedly depress investment? In this paper, we address these questions.

The intuition can be summed up as follows. In our economy, entrepreneurs operate mature technologies ∗ Department of Economics, Michigan State University. E-mail: minetti@msu.edu. Phone: +1-517-355-7349.

Address:

101 Marshall Hall, East Lansing, MI 48824-1038, USA. We wish to thank Satyajit Chatterjee, Luigi Guiso, Nobuhiro Kiyotaki, Rowena Pecchenino, Susan Chun Zhu and seminar participants at Bank of Italy/Ente Einaudi, Boston College, Central Michigan University, London School of Economics (FMG/ESRC Conference), Michigan State University, Stockholm School of Economics, Universidad Carlos III (Madrid), University of Michigan at Ann Arbor, Western Michigan University, Midwest Economic Theory Meetings, and Midwest Macroeconomics Meetings for helpful comments and discussions. All remaining errors are ours.

or restructure their activity and adopt new technologies. Lenders, in turn, learn information that is crucial for liquidating productive assets pledged as collateral when entrepreneurs default (as in Diamond and Rajan, 2001, for example). Lenders’ information on collateral assets eases entrepreneurs’ access to credit.

However, their information renders lenders conservative towards entrepreneurs’ restructuring. In fact, new technologies have less assets pledgeable as collateral. Furthermore, the information on the collateral assets of mature technologies is (partially) specific and non-transferable to the collateral assets of new technologies.

Therefore, lenders expect that the value of their information will depreciate if entrepreneurs restructure and may impede their restructuring effort to prevent this.

In this economy, entrepreneurs can form credit relationships with lenders to transfer them more information on collateral assets and obtain cheaper financing. Yet, because of the technological conservatism induced by lenders’ information, credit relationships favor technological inertia. When technological inertia arises, entrepreneurs can break their credit relationships, borrow from new lenders and restructure. However, this wastes the information accumulated within the relationships. Hence, these credit relationships and technological inertia can be long-lasting.

The distribution of firms across collateral values replicates salient features of that obtained in previous aggregate models of the credit market (e.g., Holmstrom and Tirole, 1997). Collateral-poor firms lack access to credit because they cannot pledge enough expected returns to lenders, even when these obtain high quality information on collateral. Furthermore, firms with medium collateral value obtain credit from informed (relationship) lenders. The novelty consists of firms’ technology adoption. While firms with medium collateral value potentially restructure, collateral-rich firms with credit relationships preserve the mature technology.





In fact, the conservatism of their lenders is strong because the lenders expect a large depreciation in the value of their information if the mature technology is abandoned in favor of the new technology.

We perturb this economy with an exogenous contraction in the value of collateral assets that reduces the asset price. Following the drop in the price of collateral assets the credit relationships of collateral-poor firms break down because these firms can no longer pledge enough expected returns to lenders. Consider next collateral-rich firms. The collateral shock erodes the value of the information of their lenders. This mitigates lenders’ conservatism, allowing restructuring to occur within the relationships. This also increases the incentive of collateral-rich firms to deliberately break their credit relationships, borrow from new lenders and restructure. Whether the restructuring occurs within existing relationships or through their breakdown depends on the credit regime. There is a credit regime in which lenders’ conservatism is weak and/or firms derive large benefits from credit relationships: in this regime, collateral-rich firms restructure within their relationships. There is instead a credit regime in which lenders’ conservatism is strong and/or firms derive small benefits from credit relationships: in this regime, collateral-rich firms restructure by breaking their relationships and borrowing from new lenders. Thus, depending on the credit regime, the surge in restructuring activity induced by the shock can entail a moderate or a major breakdown of credit relationships.

This is important for the aggregate impact of the shock, because the loss of asset liquidation skills that arises from a breakdown of credit relationships depresses output. Interestingly, we also show that in our model economy the credit rationing of collateral-poor firms may foster the restructuring of collateral-rich firms by bringing down asset demand and values.

The remainder of this paper unfolds as follows. In the next section, we relate the paper to the literature.

In Section 3, we outline and discuss the setup. Section 4 solves for the equilibrium. In Section 5, we investigate the effects of a collateral shock. Section 6 concludes. Proofs are relegated to the Appendix.

2 Related Literature This paper especially relates to two strands of literature. The first investigates the impact of recessions on the financial structure and the consequences for aggregate investment. We have discussed the key elements we share with Holmstrom and Tirole (1997). We also borrow properties of our modelling strategy from their paper, such as the focus on a highly tractable finite horizon economy. Den Haan, Ramey and Watson (2003) and dell’Ariccia and Garibaldi (2001) are other related papers in this strand of literature. These papers analyze the breakdown of credit relationships that can be caused by a recession in economies with search frictions. While in these studies the breakdown of credit relationships depresses investment, in our economy this breakdown depresses investment but may also foster aggregate restructuring.

The second strand of literature analyzes the impact of recessions on firms’ restructuring. Most of this literature neglects the role of the credit market for aggregate restructuring. Caballero and Hammour (2004), Ramey (2004) and Barlevy (2003) are exceptions. These studies show that credit frictions can become more severe during recessions, hindering aggregate restructuring. Caballero and Hammour (2004) shows that, because of credit frictions, production units can be destroyed at an excessive rate during a recession.

Furthermore, during the following recovery, the creation of new production units can be too slow and most of the recovery can occur via a slowdown of destruction. Ramey (2004) endogenizes financial managers’ project selection and shows that, if managers have empire-building incentives, during recessions they can discard efficient projects to preserve the size of their portfolios. Barlevy (2003) finds that credit frictions can reverse the “cleansing effect” of recessions by leading to the disruption of high-surplus production units rather than low-surplus ones. This paper endorses a view opposite to all these studies: while it negatively affects investment, the breakdown of information-intensive credit relationships also mitigates the conservatism of lenders that inhibits restructuring.

3 The Model This section describes the setup of the model. Table 1 summarizes the notation while Figure 1 illustrates the timing of events.

Agents, Goods and Technology. Consider a four-date economy ( = 0 1 2 3) populated by a unit continuum of entrepreneurial firms and a continuum of investors of measure larger than one. There is a final consumption good, which can be produced and stored, and productive assets of two vintages, mature and new. Entrepreneurs have no endowment while each investor is initially endowed with an amount  of final good. All agents are risk neutral and consume on date 3.

Each entrepreneur can implement one indivisible project. On date 2, an entrepreneur can experience a technological innovation. If the innovation occurs, the entrepreneur restructures his activity and adopts a new technology; otherwise, he operates a mature, less productive technology. Under the mature (new) technology, on date 3 the entrepreneur transforms an amount    of final good into one unit of mature (new) assets. With probability  the project succeeds and the assets yield an output  ((1 + )) of final good; otherwise the project fails and the entrepreneur goes out of business. In this case, a fraction  ( ) of mature (new) assets can be redeployed outside the firm.  ∈ [0 1] captures the amount of collateralizable assets of an entrepreneur and is uniformly distributed across entrepreneurs.  ≤ 1 is a parameter that reflects the redeployability of new assets relative to mature assets.

On date 3, each entrepreneur still in business can reuse one unit of liquidated assets, obtaining an amount  of final good.  is uniformly distributed across entrepreneurs over the domain [0 ];  represents the aggregate productivity of liquidated assets.1

–  –  –

acquires information. Following an established literature (e.g., Aghion and Bolton, 1992; Rajan, 1992), we allow the lender to exert control over production opportunities. Precisely, on date 2 the lender can carry out a costless action that affects the probability of the innovation: if she carries out this action, the innovation will occur with probability 1 −  (0    1); otherwise, the innovation cannot occur.

The lender also acquires information as a by-product of her financing activity. As in Diamond and Rajan (2001) and Habib and Jonsen (1999), information enables her to obtain more than other agents from the liquidation of the entrepreneur’s assets, that is, the lender “monitors” collateralizable assets. Precisely, the share of liquidation value that the lender obtains equals the amount of her information on the assets; the rest of the liquidation value is lost in the form of a (nominal or real) transaction cost. By contrary, we normalize to zero the net amount of final good that any other agent obtains from asset liquidation.

Having characterized the nature of information, we have to specify its amount. We allow the entrepreneur to influence this amount by choosing the type of funding, relationship or transactional. Precisely, on date 0 each entrepreneur chooses whether to establish an informationally intensive credit relationship with his financier on date 1 or simply obtain a transactional loan. Consider first mature assets:  () is the amount of information of a lender if she does (not) carry out the action for the innovation; furthermore, for a relationship lender  =  while for a transactional lender  = . This specification has two features.

First, because a credit relationship entails a long-run tie with the entrepreneur from date 0, a relationship lender learns more information about the entrepreneur’s assets (  ). Second, when a lender allows the innovation, she learns less information on mature assets (  1).2 This reflects the idea that the lender has less opportunities - and with endogenous information acquisition, less incentives - to learn information on a technology if the entrepreneur is working to abandon it. Consider next new assets: denoting  the amount of information, we let   = 0 Thus, a lender obtains less value from liquidating new assets than from liquidating mature assets - the normalization to zero is for simplicity. We will discuss this specification shortly.



Pages:   || 2 | 3 | 4 |


Similar works:

«The Australian Journal of Agricultural and Resource Economics, 50, pp. 85–101 Price or politics? An investigation of the causes Oxford, UK ARTICLEof Agricultural and Resource Economics R. Price ORIGINAL 50 Duncan &ãgr;or politics 1364-985X The Australian Journal AJARAustralian Agricultural and Resource Economics Society Inc. and Blackwell Publishers Ltd 2006 Blackwell Publishing Ltd of expropriation* Roderick Duncan† Expropriations of foreign direct investment in developing countries are...»

«Proceedings of the 5td INFORMS Workshop on Data Mining and Health Informatics (DM-HI 2010) D. Sundaramoorthi, M. Lavieri, H. Zhao, eds. SPLASH: A PROGRESS REPORT ON BUILDING A PLATFORM FOR A 360 DEGREE VIEW OF HEALTH Melissa Cefkin Susanne M. Glissmann Peter J. Haas Leila Jalali Paul P. Maglio Patricia Selinger Wang-Chiew Tan IBM Research Almaden San Jose, California pmaglio@almaden.ibm.com Abstract Location of grocery stores, available modes of transportation, economic and social demographics,...»

«Comercio Internacional y Medio Ambiente: sus Contribuciones al Desarrollo Económico y sus relaciones con los Impactos Ambientales Globales Por Luan Santos Facultad de Administración y Contabilidad de la Universidad Federal del Río de Janeiro (FACC/UFRJ) luan_dos_santos@yahoo.com.br Thauan Santos Instituto de Economía de la Universidad Federal del Río de Janeiro (IE/UFRJ) thauan_ie_ufrj@yahoo.com.br RESUMEN Las interfaces entre el comercio internacional y el medio ambiente son muy...»

«A Micro Data Approach to the Identification of Credit Crunches Horst Rottmann Timo Wollmershäuser CESIFO WORKING PAPER NO. 3159 CATEGORY 7: MONETARY POLICY AND INTERNATIONAL FINANCE AUGUST 2010 PRESENTED AT CESIFO AREA CONFERENCE ON MACRO, MONEY & INTERNATIONAL FINANCE, FEBRUARY 2010 An electronic version of the paper may be downloaded • from the SSRN website: www.SSRN.com • from the RePEc website: www.RePEc.org • from the CESifo website: www.CESifo-group.org/wpT T CESifo Working Paper...»

«Guia Practica Sobre Las Politicas De La Union Europea Training to its reality term dozen rough small expertise savings to bottom, the greeting sale ordinary details tried these actual door if the fluent own days around a half after increasing pocket employment, site store, or canadian accounting. Overlooked of the plenty as online clients but you did the criminal sub-prime call-to-action. You will be the mentor as your close taxation. Accomplish many to stay this informative place of they need...»

«sifma B Invested in America THE FINANCIAL SERVICES ROUNDTABLE Financing America's Economy October 22, 2012 By electronic submission Re: Comment Letter on Proposals to Comprehensively Revise the Regulatory Capital Framework for U.S. Banking Organizations Ladies and Gentlemen: The American Bankers Association, the Securities Industry and Financial Markets Association and The Financial Services Roundtable (Associations)1 appreciate the opportunity to comment on the three notices of proposed...»

«Program Handbook of the Master Program International Economics and Finance at the Otto-von-Guericke-University of Magdeburg Fakultät für Wirtschaftswissenschaft/ Faculty of Economics and Management 28.06.2010 What are the objectives of this study program? The program is designed to equip the students with the knowledge, methods and skills which professional applied economists or financial analysts and managers are expected to possess. The program builds upon a strong basis in quantitative...»

«Potterian Economics* Avichai Snir Department of Banking and Finance Netanya Academic College Netanya 42365, ISRAEL avichai.snir@gmail.com Tel: + 972-3-736-0835 Fax: + 972-3-535-3180 Avichai.Snir@gmail.com Daniel Levy** Department of Economics Bar-Ilan University Ramat Gan 5290002, ISRAEL Department of Economics Emory University Atlanta, GA 30322, USA Rimini Center for Economic Analysis Rimini, ITALY Tel: + 972-3-531-8331 Fax: + 972-3-535-3180 Levyda@mail.biu.ac.il JEL Codes: A13, A14, D72, D73,...»

«An Oracle White Paper May 2010 Oracle E-Business Suite Release 12.1 with Oracle Database 11g Advanced Compression Oracle E-Business Suite Release 12.1 with Oracle Database 11g Advanced Compression Executive Overview Introduction Advanced Compression Overview Testing Test Environment Test Scenarios Testing Methodology Test Results Performance Results Self Service 100 User Test Purchasing 120 User Test Order To Cash Batch Flow Payroll Batch Flow Observations GSI Observations Recommendations...»

«Vehicle Accident Policy Employees who drive company vehicles or operate their own personal vehicle for company business on a regular basis should immediately inform their supervisor when they are involved in a vehicle accident. Supervisors shall investigate accidents when possible and refer to this program for disciplinary action. The Accident Review committee, consisting of the Chairman and Two drivers, will determine preventabilty or non-preventabilty. The Committee will review all Class...»

«Georg-August-Universität Göttingen Institut für Wirtschaftsinformatik Professor Dr. Matthias Schumann Platz der Göttinger Sieben 5 37073 Göttingen Telefon: + 49 551 39 44 33 + 49 551 39 44 42 Telefax: + 49 551 39 97 35 www.wi2.wiso.uni-goettingen.de Arbeitsbericht Nr. 16/2001 Hrsg.: Matthias Schumann Yang Liu New Issues in Credit Scoring Application © Copyright: Institut für Wirtschaftsinformatik, Abteilung Wirtschaftsinformatik II, Georg-August-Universität Göttingen. Das Werk...»

«SAP How-To Guide for MDG-F ALE Replication from MDG Hub to ERP Using the Same Client Applies to Master Data Governance for Financials (MDG-F) with release version 7.0 running on SAP ECC 6.0 EhP 6 SP 09, SAP ECC 6.0 EhP 7 SP 02 or higher. For more information, visit the Master Data Management homepage (http://scn.sap.com/community/mdm/master-data-governance). Summary SAP Master Data Governance provides out-of-the box solutions for the central management of master data objects. Domain-specific...»





 
<<  HOME   |    CONTACTS
2016 www.dis.xlibx.info - Thesis, dissertations, books

Materials of this site are available for review, all rights belong to their respective owners.
If you do not agree with the fact that your material is placed on this site, please, email us, we will within 1-2 business days delete him.