Article

Imperfect Information, Uncertainty, and Credit Rationing: A Reply

University of California, Davis, Davis, California, United States
Quarterly Journal of Economics (Impact Factor: 5.92). 02/1984; 99(4):869-72. DOI: 10.2307/1883130
Source: RePEc
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    • "Propositions to reduce adverse selection in contracts include screening (Broecker, 1990), multi-period contracting (Hosios andPeters, 1989), and credit rationing (Baltensperger, 1978). However, credit rationing leads to increased price of the loans (Jaffee and Russell, 1976), which eventually results in financial exclusion of poor borrowers. In Subsection 4.1, we discuss the Islamic rulings to securitize financial claims backed by tangible assets to moderate this issue. "
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    ABSTRACT: Securitization enhances liquidity of debt contracts. However, its structural deficiency at origination has led to the freezing of its secondary market and failure of institutions holding the collateral. This paper builds on key cultural (i.e., Islamic) rulings to rectify flaws entrenched in securitized debt stemming from asymmetric information and agency issues. These injunctions help in the efficient underwriting of debt contracts across the globe to: (i) redeem its ‘toxicity’; (ii) guarantee liquidity; (iii) alleviate fragility of the financial system; and (iv) promote economic growth. Finally, this study promotes a rethink of the current ‘Islamic’ financial system from a narrow literalist juridical perspective to one that is grounded in financial economics.
    Full-text · Article · Jan 2016
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    • "But a speci…c borrower's "promise" is not as good as that by another borrower and there may be no objective way to determine the likelihood that the "promise" will be kept. Moral hazard and adverse selection a¤ect the likelihood of loan repayment whence asymmetric information and incentive (principal-agent) problems may lead credit rationing to persist in equilibrium (Ja¤ee and Russell, 1976; Stiglitz and Weiss, 1981). Banks, through adequate screening and monitoring procedures, can overcome asymmetric information and incentive problems and reduce …rms'credit constraints (Diamond, 1984; Rajan, 1992; Bhattacharya and Thakor, 1993). "
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    ABSTRACT: This paper tests the impact of an imperfect firm-bank type match on firms' financial constraints using a dataset of about 4,500 Italian manufacturing firms. Considering an optimal match of opaque (transparent) borrowing firms with relational (transactional) lending main banks, the possibility arises of firm-bank "odd couples" where opaque firms end up matched with transactional main banks. We show that the probability of credit rationing increases when the mismatch between firms and banks widens. Our conjecture is that "odd couples" emerge either because of organizational changes in the credit market or since firms observe only imperfectly banks' lending technology.
    Full-text · Article · Apr 2015 · Journal of Financial Intermediation
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    • "Furtermore, concerning the risk level of business, previous research has shown how young and small firms are associated with high risk as they lack past experience and no complete information on their operational activities and quality are available. Due to information asymmetries, small and young enterprises are often subject to 'credit rationing' (Jaffe and Russel 1976; Stiglitz and Weiss 1981; Fazzari et al. 1988; Winker 1999). "
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    ABSTRACT: Purpose – The purpose of this paper is to identify the factors affecting the growth of companies listed on the Alternative Investment Market (AIM), the London Stock Exchange market for young and growing companies. Design/methodology/approach – The author investigates post-initial public offering (IPO) growth for a panel of 665 companies listed on the AIM between 1995 and 2006. The empirical model uses the generalized method of moment-System (GMM-SYS) estimator.Findings – The findings confirm that small companies listed on the AIM grow more quickly after the IPO. It seems that both human capital and firm characteristics are important determinants of their rapid growth. Practical implications – The results of this study have some implications for policy. Policy makers should take account of the relevance of an efficient financial system. It is important also to consider the process of transformation of the cultural and behavioural attitudes of various countries towards entrepreneurship.Originality/value – This paper analyses the determinants of firm growth in a particular entrepreneurial setting, that is, IPO on the AIM, the sub-market of the London Stock Exchange.
    Full-text · Article · Mar 2015 · International Journal of Entrepreneurial Behaviour & Research
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