Porchiung Ben Chou, Michael A. Ehrlich and Ronald Sverdlove
By applying models of social and economic networks to financial institutions, the purpose of this paper is to address the issues of how policy makers can promote financial network…
Abstract
Purpose
By applying models of social and economic networks to financial institutions, the purpose of this paper is to address the issues of how policy makers can promote financial network stability and social efficiency.
Design/methodology/approach
The authors characterize the decentralized network formation of financial institutions in three stages through which institutions choose to become member banks connected to a central bank, bank-holding company subsidiaries or non-banks. Financial institutions choose one of the three roles in an endogenous process by considering the effects of sharing shocks among the members of the network. In the model, there is a social-welfare-maximizing government regulator at the center of the network.
Findings
The authors show that the stable equilibrium network is not always the efficient network, so the central authority must use policy instruments to ensure that the stable equilibrium network is as close as possible to the efficient network.
Research limitations/implications
To obtain the theoretical results, the authors make assumptions about the utility function and risk aversion of a financial institution, as well as about the costs of network formation. These assumptions might need to be relaxed to bring the model closer to real-world institutions.
Practical implications
The results suggest that regulators must try to set their policy variables to make the efficient network as close as possible to the stable network.
Originality/value
The contribution is to incorporate concepts from social network theory into the modeling of financial networks. The results may be of use to regulators in maintaining the stability of the financial system.
Details
Keywords
– The purpose of this paper is to show how corporate policy with respect to the seniority structure of debt changes after a merger.
Abstract
Purpose
The purpose of this paper is to show how corporate policy with respect to the seniority structure of debt changes after a merger.
Design/methodology/approach
The author uses data on the seniority and other properties of outstanding bonds of acquiring and target firms before mergers and of the combined firm after the merger. The author tests whether a combined firm that has acquired junior debt in the merger attempts to move toward the senior-only structure of the acquiring firm before the merger.
Findings
The author finds that acquiring firms do not rapidly move back toward that structure after acquiring senior debt.
Research limitations/implications
The results of this study are consistent with those of many recent studies on capital structure, which find that changes in capital structure tend to persist, and that firms are slow to revert to previous structures aftershocks, such as those that may result from mergers.
Practical implications
The paper suggests that there may be an advantage for firms to sell off acquired junior debt after a merger.
Originality/value
This paper extends previous studies of capital structure to the more detailed level of debt seniority structure.