Tag: credit

Professor Jared Jennings takes questions after presenting his research.

Assistant Professor of Accounting Jared Jennings presented research focusing on management forecasting in debt contract negotiations to a corporate audience as part of Olin’s Business Research Series, Jan. 27 in Bauer Hall.

Previous research in this area has focused on the monitoring role of historical information in debt contracting. Jennings’ research focuses on the use of information obtained during the screening process prior to a loan contract’s inception. The researchers analyzed management forecasts and their accuracy to measure the borrower’s ability to anticipate and respond to future economic conditions.

The researchers found that there was an almost 12% reduction in the initial debt contract spread between borrowers with the least and most accurate management forecasts.

Don Dent, Dick Mahoney and Jared Jennings discuss his research after the presentation.

Olin’s Business Research Series, features recent faculty research including annual winners of the Olin Award. Faculty presentations throughout the year and executive summaries published on the Olin website aim to translate noted academic papers into nuggets of valuable information that managers can apply in today’s competitive global marketplace.

Jenning’s presentation included research published in his paper, “Are better forecasters better borrowers? Management forecast accuracy and the cost of debt.”  The paper was a top contender in the  2015 Olin Award competition that honors research that impacts business.

Contact and learn more about Professor Jennings here.

The Olin Award and Business Research Series are sponsored by Richard J. Mahoney, Olin Distinguished Executive in Residence and former chairman and CEO of Monsanto.
Link to Olin faculty research here.

New research reveals the dynamics that influence how bank capital structure affects credit monitoring. The study titled, “Who Monitors the Monitor: Bank Capital Structure and Borrower Monitoring,” details how researchers measure the effects of a bank’s capital structure on its credit monitoring, and delivers new evidence explaining how government safety nets that enhance banking protections affect bank capital structure, and, in turn, influence bank monitoring and risk-taking behavior.

The research co-authors are Olin’s Anjan Thakor, and Sudarshan Jayaraman, associate professor of accounting at Simon Business School at the University of Rochester .

The research highlights four main findings:
* Banks take on less equity and more debt when creditor rights increase and the reverse when creditor rights decrease.
* This indicates that bank equity appears to provide stronger monitoring incentives to banks and that they need less of this mechanism when there is a lower need for monitoring.
* These effects are not driven by the supply side (i.e., bank creditors are more willing to lend to the bank when creditor rights increase).
* The increase in bank leverage increases the bank’s risk-taking appetite, especially when government guarantees are in place.

The co-authors studied legal reforms in 14 countries across Europe and Asia during the 1990s and early 2000s.

The researchers conclude that stronger creditor rights tend to increase the bank’s cost of debt, particularly when governments offer a strong guarantee to banks. These results indicate that stronger banking rights needs are not always better and that legal remedies that strengthen banking rights can bring about unintended consequences as banks incur higher debt and assume greater risks.

Read the complete news release from Simon Business School.

Related research from Anjan Thakor.

Image: Flickr Creative Commons: MNB: ninety odd years of banking 1825-1916, Claire T. Carney Library, University of Massachusetts Dartmouth