Corporate Finance

We propose an origination-and-contingent-distribution model of banking, in which liquidity demand by short-term investors (banks) can be met with cash reserves (inside liquidity) or sales of assets (outside liquidity) to long-term investors (hedge funds and pension funds). Outside liquidity is a more efficient source, but asymmetric information about asset quality can introduce a friction in the form of excessively early asset trading in anticipation of a liquidity shock, excessively high cash reserves, and too little origination of assets by banks.

In this chapter, I describe the coordinates of the global application of public-private partnerships (PPP) and identify central commonalities of sector collaboration for both infrastructure development and urban redevelopment/regeneration projects. The comparison across these two types of "hard" asset-based initiatives will, I hope, highlight the central issues of implementation and underscore the need for policymakers to address the nature of risk sharing, which I believe is central to the PPP strategy at the project level.

Combinatorial auctions (CAs) are multi-unit auction mechanisms in which bidders can bid on combinations of items or packages. CAs have received considerable attention from academia, and their practical use has increased significantly over recent years especially in procurement projects. Units in procurement projects often exhibit cost synergies, and using a CA can be particularly advantageous to the auctioneer because it enables bidders to express their cost synergies in the bidding process.

In the wake of the crisis of 2008 and onwards, it has become fashionable to return to the work of Hyman Minsky and Charles Kindleberger, and cite them as showing the ubiquity of crises, how they are an inevitable result of human nature, and how they have therefore to be carefully and thoroughly regulated against. Charles Calomiris considers this view, first clearly distinguishing between financial crises and banking crises.

This paper reviews the pattern of bank failures during the financial crisis and asks whether there was a link with corporate governance. It revisits the theory of bank governance and suggests a multiconstituency approach that emphasizes the role of weak creditors. The empirical evidence suggests that, on average, banks with stronger risk officers, less independent boards, and executives with less variable remuneration incurred fewer losses. There is no evidence that institutional shareholders opposed aggressive risk-taking.

Financial openness is often associated with higher rates of economic growth. We show that the impact of openness on factor productivity growth is more important than the effect on capital growth. This explains why the growth effects of liberalization appear to be largely permanent, not temporary. We attribute these permanent liberalization effects to the role financial openness plays in stock market and banking sector development, and to changes in the quality of institutions. We find some indirect evidence of higher investment efficiency post-liberalization.

We analyze contagious sovereign debt crises in financially integrated economies. Under financial integration banks optimally diversify their holdings of sovereign debt in an effort to minimize the costs with respect to an individual country"s sovereign debt default. While diversification generates risk diversification benefits ex ante, it also generates contagion ex post. We show that financial integration without fiscal integration results in an inefficient equilibrium supply of government debt.

In this chapter, Kenneth Ayotte and Patrick Bolton model the role that mandatory standardization plays in reducing the costs of financial contracting and improving liquidity. In particular, they identify opportunities for financial contractors to appropriate value from unknowing third parties and show that rules that standardize contracts can serve as a commitment device against such demand-dampening pitfalls facing these other parties. Mandatory standardization thereby can improve the liquidity of secondary markets from loan contracts.

As the subprime mortgage market flourished in the 1990s, innovative lenders turned to a new type of loan: the 2/28 mortgage, designed to allow borrowers with less-than-ideal credit to buy a home and to repair their credit histories. This mortgage offered a fixed two-year "teaser" rate, followed by 28 years of payments that would adjust according to market rates such as LIBOR. As an example shows, the teaser rate was relatively affordable, but when the adjustable rate kicked in, borrowers might see their monthly payments eventually increase by as much as 50 percent.