Financial Structure, Managerial Compensation and Monitoring

When a firm has external debt and monitoring by shareholders is essential, managerial bonuses are shown to be an optimal solution. A small managerial bonus linked to firm's performance not only reduces moral hazard between managers and shareholders, but also between creditors and monitoring shareholders. A negative relation between corporate bond yields and managerial bonuses can be predicted. Furthermore, the model shows how higher managerial pay-performance sensitivity goes hand in hand with greater company leverage and lower company diversification. These predictions find some support in the empirical literature.managerial compensation; financial structure; monitoring; diversification.

Solidarity Behind Microfinance

In this paper we analyse the role of peers' solidarity in fostering investment in production in the context of micro?nance. When there is asymmetric information between lenders and borrowers on the use of borrowed funds and loans are not collateralized, there is a high chance that borrowers use loans for current consumption sacrifying productive projects. We study the effect of solidarity in the form of insurance from a network of relatives on borrowers' intertemporal preference for consumption and its impact on myopic behavior. The main result of the model is that solidarity might increase the share of funds devoted to investment but it might also reduce the amount of the loan in equilibrium. This result is in accordance with several features of micro-lending. We test the model using survey data from the World Bank on a sample of households in Bangladesh during the period 1991-1992. Empirical fi?ndings support the predictions of the model.Microfinance, credit rationing, social networks

The Impact of Mergers on the Degree of Competition in the Banking Industry

This paper analyses the relation between competition and concentration in the banking sector. The empirical answer is given by testing a monopolistic competition model of bank branching behaviour on individual bank data at county level (départements and provinces) in France and Italy. We propose a measure of the degree of competiveness in each local market that is function also of market structure indicators. We then use the econometric model to evaluate the impact of horizontal mergers among incumbent banks on competition and discuss when, depending on the pre-merger structure of the market and geographic distribution of branches, the merger is anti-competitive. The paper has implications for competition policy as it suggests an applied tool to evaluate the potential anti-competitive impact of mergers.Banking Industry, Competition and Market Structure, Merger Policy

The Impact of Mergers on the Degree of Competition in the Banking Industry

This paper analyses the relation between competition and concentration in the banking sector. The empirical answer is given by testing a monopolistic competition model of bank branching behaviour on individual bank data at county level (départements and provinces) in France and Italy. We propose a measure of the degree of competiveness in each local market that is function also of market structure indicators. We then use the econometric model to evaluate the impact of horizontal mergers among incumbent banks on competition and discuss when, depending on the pre-merger structure of the market and geographic distribution of branches, the merger is anti-competitive. The paper has implications for competition policy as it suggests an applied tool to evaluate the potential anti-competitive impact of mergers.

Multiple-bank lending: diversification and free-riding in monitoring

This paper analyses banks' choice between lending to firms in exclusive relationships and sharing financing with other banks in a context where both firms and banks are subject to moral hazard problems, and bank monitoring is essential for financing to take place. Multiple-bank lending is optimal whenever the benefit of greater diversification in terms of higher per-project monitoring dominates the costs of free-riding problem and duplication of efforts. The model predicts a greater use of multiple-bank lending when banks are small relative to the size of investment projects, when firms are less profitable, and when poor financial integration, strict regulation and inefficient judicial systems make monitoring more costly. These results are consistent with some empirical observations concerning small business lending and, to some extent, with the formation of syndicates.

Multiple-bank lending: diversification and free-riding in monitoring

This paper analyzes the optimality of multiple-bank lending, when firms and banks are subject to moral hazard and monitoring is essential. Multiple-bank lending leads to higher per-project monitoring whenever the benefit of greater diversification dominates the costs of free-riding and duplication of effort. The model predicts a greater use of multiple-bank lending when banks are highly leveraged, firms are less profitable and monitoring costs are high. These results are consistent with some empirical observations concerning the use of multiple-bank lending in small and medium business lending.multiple monitors, diversification, free-riding problem, multiple-bank lending.

Close relationships between banks and firms: is it good or bad?

This paper investigates the issues involved in cross-ownership between banks and firms. The idea is that congruity among the parties in control of the bank and the firm allows to save on monitoring costs, but it gives rise to a conflict of interest between on one hand the parties in control of the bank and on the other hand the outside investors, as for example depositors, of the bank. Nevertheless, the paper shows that there are benefits from cross-ownership, whenever the bank involved in the relationship is debt financed and well diversified

Do rivals enhance your credit conditions?

In a model where rms rely on bank nancing to build capacity, put up specialized productive assets as collateral, and then compete a la Cournot, we introduce a probability of default. We investigate how the number of competitors affects the equilibrium amount of bank credit and derive conditions under which an inverted U-shaped relationship occurs. On one hand, more competitors enhance the resale value of collateralized productive assets. On the other hand, more competitors shrink rms' prots and the resulting income that can be pledged to banks. We then extend the analysis to rms outside the Cournot industry that are willing to buy productive assets in liquidation and show that the equilibrium bank credit becomes monotonically decreasing in the number of competitors

Diversification and delegation in firms

This paper shows how separation of ownership and control may arise as a response to overload costs, despite agency costs, and how conglomerates arise as solution to information asymmetries in capital markets. In a context where entrepreneurs have the ability to run projects and improve their future cash flow, there could be rationing of credit due to moral hazard between entrepreneurs and investors. Diversification could mitigate the moral hazard problem. However for a single entrepreneur running many different projects might be increasingly costly due to overload costs. Delegating the running of projects to several managers can not only reduce overload costs, but also the moral hazard problem of external financing. In this paper we show that delegation can be the only way to exploit the gains from diversification when overload costs of diversification are high; delegation thus is the key ingredient to be able to diversify