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This paper examines whether there are efficiencies that benefit issuers and underwriters when a financial intermediary concurrently lends to an issuer while also underwriting its public securities offering. We find issuers, particularly noninvestment-grade issuers for whom informational economies of scope are likely to be large, benefit through lower underwriter fees and discounted loan yield spreads. Underwriters, both commercial banks as well as investment banks, engage in concurrent lending and provide price discounts, albeit in different ways. We find concurrent lending helps underwriters build relationships, increasing the probability of receiving current and future business. [ABSTRACT FROM AUTHOR]

We derive a behavioral measure of the IPO decision-maker's satisfaction with the underwriter's performance based on Loughran and Ritter (2002) and assess its ability to explain the decision-maker's choice among underwriters in subsequent securities offerings. Controlling for other known factors, IPO firms are less likely to switch underwriters when our behavioral measure indicates they were satisfied with the IPO underwriter's performance. Underwriters also extract higher fees for subsequent transactions involving satisfied decision-makers. Although our tests suggest that the behavioral model has explanatory power, they do not speak directly to whether deviations from expected utility maximization determine patterns in IPO initial returns. [ABSTRACT FROM AUTHOR]

Conglomerates, trade credit arrangements, and banks are all instances of financial intermediation. However, these institutions differ significantly in the extent to which the projects financed absorb aggregate intermediary risk, in whether or not intermediation is carried out by a financial specialist, in the type of projects they fund and in the type of claims they issue to investors. The paper develops a simple unified model that both accounts for the continued coexistence of these different forms of intermediation, and explains why they differ. Specific applications to conglomerate firms, trade credit, and banking are discussed. [ABSTRACT FROM AUTHOR]

Recent work suggests that financial development is important for economic growth, since financial markets more effectively allocate capital to firms with high value projects. For firms in poorly developed financial markets, implicit borrowing in the form of trade credit may provide an alternative source of funds. We show that industries with higher dependence on trade credit financing exhibit higher rates of growth in countries with weaker financial institutions. Furthermore, consistent with barriers to trade credit access among young firms, we show that most of the effect that we report comes from growth in the size of preexisting firms. [ABSTRACT FROM AUTHOR]

This paper directly tests the hypothesis that upstairs intermediation lowers adverse selection cost. We find upstairs market makers effectively screen out information-motivated orders and execute large liquidity-motivated orders at a lower cost than the downstairs market. Upstairs markets do not cannibalize or free ride off the downstairs market. In one-quarter of the trades, the upstairs market offers price improvement over the limit orders available in the consolidated limit order book. Trades are more likely to be executed upstairs at times when liquidity is lower in the downstairs market. [ABSTRACT FROM AUTHOR]

Diamond (1991) argues that a firm's reputation determines whether it borrows directly or through an intermediary. We test the Diamond model by examining the quantity response of commercial paper issued by bank holding companies to a rating downgrade. From 1986 to 1991, cumulative abnormal declines averaged 6.69 percent in the first two weeks after the downgrade and 11.05 percent in the subsequent 12 weeks. In contrast to commercial paper issued by bank holding companies, large CDs issued by affiliated banks did not change significantly in the period around a downgrade, suggesting that deposit insurance may have removed market discipline from the CD market. [ABSTRACT FROM AUTHOR]

We model reputation acquisition by investment banks in the equity market. Entrepreneurs sell shares in an asymmetrically informed equity market, either directly, or using an investment bank. Investment banks, who interact repeatedly with the equity market, evaluate entrepreneurs' projects and report to investors, in return for a fee. Setting strict evaluation standards (unobservable to investors) is costly for investment banks, inducing moral hazard. Investment banks' credibility therefore depends on their equity-marketing history. Investment banks' evaluation standards, their reputations, underwriter compensation, the market value of equity sold, and entrepreneurs' choice between underwritten and nonunderwritten equity issues emerge endogenously. [ABSTRACT FROM AUTHOR]

The minimum cost output configuration for a firm may change as the result of a variety of factors, including changes in market structure. In this paper we test this structural change hypothesis with savings and loan data. We find support for the hypothesis that separable, constant returns to scale production functions characterize the average savings and loan in our sample in 1983. This is in contrast to the cost complementarities found in 1978. We argue that this result may be the result of regulatory changes that allowed savings and loans to alter their production mix to fully capture the benefits of joint production. [ABSTRACT FROM AUTHOR]

The authors investigate the role of quantity or liquidity versus price risk and the theory of financial intermediation. They show that an intermediary facing quantity uncertainty, that is positively associated with interest rates, will make fewer loans when compared with a situation where risks are independent. They also show that the depository firm may not shrink in this case since it will offer a higher deposit rate in order to attract additional deposits, which can then be sold in a slack market. Under these conditions the existence of positively associated interest and liquidity risk leads to a situation where depository intermediaries limit their traditional lending operations while also raising an even larger quantity of funds to sell in the lower risk securities markets.

This paper considers the maturity intermediation and intertemporal lending decisions of risk-averse financial intermediaries. In particular, the maturity mismatch problem and the fixed-versus-variable-rate lending decision are modeled when the major source of risk involves uncertain future interest rates. The results imply that the strategy of matching the maturity of assets and liabilities is not generally optimal or even minimum risk. This is due primarily to the "built-in" hedge that the intermediary has as a result of rolling over short-term loans while continuing to finance long-term loans. Intertemporal dependencies between loan demand and costs (or both) also have an effect on the optimal degree of maturity mismatching and provide one rationale for making loans at rates below current marginal cost. [ABSTRACT FROM AUTHOR]

In this paper, we derive a model of the individual banking firm facing stochastic inflation. The bank is considered as a depository financial intermediary operating in the primary market as a multiproduct price discriminating firm. A secondary market is also considered where liquidity surpluses and deficits are traded. Two types at assets and liabilities are assumed deposits and loans linked to a general price level and nonlinked instruments. Effects of changes in the parameters such as inflation rate and variability, reserve requirements are analyzed. [ABSTRACT FROM AUTHOR]

This paper develops a theory of financial intermediation that highlights the contribution of intermediaries as informed agents in a market with imperfect information. We consider a venture capital market where the entrepreneurs select the qualities of projects and their perquisite consumptions, about which the investors are imperfectly informed. It is shown that when all investors have positive search costs, the entrepreneurs are induced to offer the unacceptable inferior projects ("lemons" only), and the investors will not enter the venture capital market, but put their funds in other low return investments--an undesirable allocation of resources. Beginning with an initial undesirable situation, the financial intermediaries may evolve as informed agents that induce a Pareto-preferred allocation, leading the investors to a higher welfare state. We focus our analysis on the existence of intermediation equilibra when the market for intermediation services is competitive. The distribution of returns on projects, the fees charged by intermediaries, and the fraction of institutional holdings are all endogenous in equilibrium. It is shown that (i) there cannot be a competitive intermediation equilibrium with very high institutional holdings, and (ii) in other cases multiple equilibra may exist, but the one with the highest institutional holdings dominates the others in a Pareto sense. [ABSTRACT FROM AUTHOR]

This paper explores the theoretical and empirical determinants of the commercial loan rate charged by commercial banks based on a model of financial intermediary behavior which assumes monopolistic competition in asset and liability markets. The model incorporates the constraint that banks must maintain at least a minimum quantity of bonds in asset portfolios. Equations are estimated on a time series basis to explain the behavior of commercial loan rates over the period 1953 to 1980. The evidence appears consistent with the hypothesis that commercial banks operate in a market characterized by imperfect competition and that they explicitly set loan rates. [ABSTRACT FROM AUTHOR]

This paper compares the optimal lending decisions of financial intermediaries that differ in their risk exposure. All intermediaries are assumed to face a loan demand described by a random applicant arrival process with each applicant offering a unique risk-adjusted rate of return; loan demand is therefore uncertain in both quantity and quality. The intermediaries differ in terms of their risk exposure because of disparate funding practices. Intermediaries functioning as brokers minimize their exposure by borrowing funds only as demand is realized, whereas those behaving as asset-transformers borrow in advance of realizing loan demand, thereby maintaining a loanable funds inventory and sustaining the related exposure. The optimal sequential lending policy is shown to involve setting a credit standard that becomes stricter with the length of the intermediary's planning horizon and the volume of loans outstanding. Most importantly, it is shown that brokers adopt stricter credit standards than asset-transformers and thereby reduce their volume of lending. [ABSTRACT FROM AUTHOR]

The theory of corporate finance is not directly applicable to financial intermediary decision-making. The lack of applicability stems largely from the particular conditions that distinguish intermediary operations from those of the nonfinancial firm. First, when intermediaries accept deposit financing, they must produce services such as liquidity and convenience at considerable expense for real resources. Second, the introduction of intermediation is likely to be accompanied by incomplete markets so that shareholder unanimity is not in general valid. In this paper, a model with incomplete markets is developed and a shareholder approved rule for intermediary capital structure decisions is derived. [ABSTRACT FROM AUTHOR]

The principle focus of this paper is the theory of financial intermediation. In addition to offering some insight into the role of financial intermediaries, this paper presents an important conclusion about the resolution of the moral hazard problem in financial markets which arises when there is imperfect information. It is demonstrated that initial wealth endowments resolve the moral hazard problem in that they function as a guarantee of the reliability of information. The general procedure adopted in this paper is to search for a Rational Expectations equilibrium in a capital market with imperfect information about the value of firms. The concept of equilibrium employed here is somewhat broader than that which has been used in recent treatments of incentive signalling problems.

Concern for the social objective of an efficient financial system led several researchers to study economies of scale in financial intermediation during the 1960s. These studies were used to draw inferences regarding the optimal structure of financial institutions. Today, there is added reason to be concerned with the costs of providing financial intermediary services. In 1966, the Interest Rate Control Act extended deposit rate ceilings to savings and loan associations and other thrift institutions much as the Banking Act of 1933 had previously authorized these controls over deposit rates of banks. This imposition of deposit rate ceilings has created incentives for savings associations to attract deposits by inducements in addition to the payment of explicit deposit rates. In a deposit rate-constrained savings deposit market, the competitive mechanism is exercised through the provision of financial and nonfinancial goods and services to depositors in order to increase deposit holdings. These goods and services take a great variety of forms but to the financial intermediary result in added expenditures for labor, capital equipment or intermediate product. Nonrate competition—the financial analogue to nonprice competition—has become an important equilibrating adjustment mechanism in the rate-controlled savings deposit market. As a result of engaging in nonrate competition for deposits, observed average cost per deposit dollar for savings and loan associations have increased since the imposition of deposit-rate controls, with the increase between 1967 and 1974 of 21 percent nearly equaling the recorded reduction between 1948 and 1967. Changes in observed average cost reflect changes in both the average production cost of financial interrnediation and the cost of nonrate competition. The purpose of this paper is to study the costs of financial intermediation in the savings and loan industry in a framework that allocates total costs into the costs ... [ABSTRACT FROM AUTHOR]

In perfect capital markets, financial intermediaries lack a raison d'être. Traditionally, intermediaries have been portrayed solely as issuers of indirect debt who develop and exploit a wedge between equilibrium borrowing and lending rates. But this explanation ignores the fact that non-mutual depository institutions intermediate for their shareholders, too. This paper seeks to explain how a firm can perform a useful function by holding a portfolio of efficiently priced securities that its stockholders could in principle have purchased directly. Clearly, the answer has to lie in models that allow a financial finn to build or maintain security portfolios for its shareholders more cheaply than its shareholders could on their own. [ABSTRACT FROM AUTHOR]

There is little doubt that a theory of financial intermediaries has not yet been systematically and rigorously formulated. In an ambitious attempt in this regard, Benston and Smith (hereafter B-S) specify that the necessary conditions for a meaningful analytical framework of the demand for financial services are that it incorporates a multiperiod model whereby the individual is postulated to maximize expected utility of consumption, risk is explicitly recognized, and both substitution effects and transaction costs are integrated into the analysis. B-S feel that the standard form of the CAPM meets "all of the above listed minimal requirements except the last, that it be capable of examining non-zero transaction costs." However, B-S feel that the efficient frontier mappings can be changed to approximately reflect transaction costs and hence Sharpe-Lintner theory is presumably an appropriate analytical dimension in deriving a theory of financial intermediaries. [ABSTRACT FROM AUTHOR]

In this paper we have tried to show that the analysis of transactions costs is central to the theory of financial intermediation. Financial intermediaries produce financial commodities which can be used to effect consumers' inter-temporal, intra-temporal and state determined consumption decisions. Changes in technology and in consumer borne transactions costs alter the types of financial commodities produced, the way in which they are packaged, and the institutions that produce and sell them to consumers. Furthermore, government regulation essentially restricts financial intermediaries from changing the specific commodities they produce to meet changes in technology and consumer tastes. We believe a more complete analysis would show the relationship between specific types of transactions costs and the type of financial intermediary and financial commodity that should arise to reduce these costs. We feel that this approach represents an appropriate direction for future analysis. [ABSTRACT FROM AUTHOR]

The purpose of this paper is to analyze formally the conditions under which financial intermediation occurs and its effect on the volume of financial flow, the rate of interest, and the quality of funds to borrowers and claims to lenders, under conditions of perfect competition and monopoly. Financial intermediation is the transfer of funds from primary lenders to primary borrowers by transforming lenders' funds into indirect funds, and borrowers' securities into indirect securities. Financial production consists in financial transformation, and the capacity to transform funds and their corresponding securities may be called financial technology. Financial intermediaries come into play if the new funds and securities which will result from financial transformation are sufficiently attractive to potential primary borrowers and lenders, respectively, for them to pay the price of this transformation. The study of financial markets is the study of primary financial demand and supply and of financial technology. Given primary demand and supply, the state of financial technology, jointly with prices of inputs to the financial industry, determines (a) the quantity of funds; (b) the quality of funds to borrowers and of securities to lenders; and (c) the rates of interest to borrowers and lenders. [ABSTRACT FROM AUTHOR]

The Hunt Commission's Report is the second of the national commission reports in a decade which deals with the structure, regulation and operations of financial institutions. The first was the Report of the Commission on Money and Credit issued in 1961. in its general construct and its working philosophy, the Hunt Report is very similar to the recommendations made in that part of the 1961 Report of the CMC which dealt with financial institutions. A large share of the Hunt Report deals with the thrift institutions. In large part, this interest arose from a preoccupation with the fate of housing in the credit crunches which followed the outbreak of hostilities in Viet Nam, and the subsequent inflationary posture of budget policy and monetary policy. [ABSTRACT FROM AUTHOR]

The article discusses financial intermediation. Essential to the work of intermediaries is the issuance of claims for funds, and the use of those funds to purchase other financial assets The current paper examines the conditions under which an intermediary will accept savings deposits and purchase mortgages. After developing a three-security model for intermediation, the author applies it to a specific instance that incorporates a mean-variance preference function. The key insight is that for both assets and liabilities, portfolios cannot be selected independent of yield parameters.

The article investigates disintermediation by means of policy loans at life insurance companies. By 1969 such loans had increased six-fold over 1965 levels. Data were compiled from 1965 to the middle of 1970 for fifteen prominent life insurance firms. Regression analysis revealed several insights. Interest rates were the most important independent variable for determining the volume of policy loans, and their impact was almost immediate. In tests of joint variables, the combination of interest rates and money supply was significant.

Professor Aliber looks at the United States as a financial intermediary for the rest of the world and examines three hypotheses regarding the nature of this intermediation process. He does this by looking at the difference in the slope of yield curves among countries. One of the three hypotheses is the familiar proposition that capital markets are better developed in the United States than elsewhere. The second, attributable to Despres, Kindleberger and Salant (DKS), is that liquidity preference is higher abroad than in the United States. The third hypothesis, which I take to be Professor Aliber's, introduces the notion that exchange risk helps to explain differences in yield curves among countries. The three alternative hypotheses have different implications for feedback from restriction on capital outflow--and this is the policy significance of the analysis. [ABSTRACT FROM AUTHOR]

This paper is directed toward two issues. The first involves several competing explanations for the U.S. position in international capital market relationships. One of these explanations involves the concept of international financial intermediation; the usefulness of this analogy to domestic intermediation is questioned. The second involves the implications of each of these explanations for capital market relationships for the impact of U.S. capital outflows on the U.S. payments balance. [ABSTRACT FROM AUTHOR]

The article focuses on the theoretical explanation of equilibrium differences between holding period yields of government debts at various maturities. Empirical evidence suggesting direct relationships between yield and maturity is cited and theoretical modeling is presented seeking to account for positive differentials and its possible behavior in regards to exogenous variable shifts. The basis of the model is derived through universal risk aversion principles, but additional consideration is also given to the influence of financial intermediaries in nonuniversal paradigms.

The article focuses on the inclusion of financial intermediation within macroeconomic monetary models. Qualitative analysis is presented of intermediary behavior and their impact on the real and financial sectors, particularly through interest rate manipulation on changing credit condition claims. Examinations are provided to illustrate the issue through the differences of commercial bank deposits and those of non-bank intermediaries. Additional discussion is also given regarding asset shifts on currency, demand deposits, and open market securities.

The article focuses on questions of the appropriateness of interest rate ceilings within conditions of certain monetary restraint. The author compares the feasibility of interest rates versus interest ceilings in the allocation of credit flows in the U.S. monetary policy of the 1960s. The nature of institutional monetary constraints on financial incentives and resultant conditions is reviewed, with particular interest into the historical market shifts which occurred between 1962-1965. It is concluded that while common theory goes against rate ceilings, they have proven beneficial in certain scenarios towards protecting financial institutions.

The article examines the role of financial intermediaries in the U.S. during the period 1898-1930. After a survey of theoretical considerations, the authors present empirical data for primary security issues and gross national product (GNP), and for both direct and indirect finance ratios. Figures indicate financial intermediation steadily declines from 1898 to 1920, but then grew rapidly during the 1920s. Accompanying charts show the relationship between corporate bond yields and GNP/money supply.

The article is in response to the previous comment regarding the article "Information Production, Market Signaling, and the Theory of Financial Intermediation," by T. Campbell and W. Kracaw, which discussed information production and financial intermediation. The arguments from this article were commented on by Y. Chan, who questioned the methods of Campbell and Kracaw when studying the role of wealth endowments. Kracaw and Campbell state that Chan incorrectly defined the limit in the model to riskless borrowing. The article compares the research to that of H. Leland and D. Pyle.

The article comments on the 1982 article "Information Production, Market Signaling, and the Theory of Financial Intermediation," by T. Campbell and W. Kracaw. The article discusses the model produced for the study, the T. Campbell and W. Kracaw (C-K) model, and states that if the information producers can borrow in the market in C-K's model, then the production of information is always efficient. The articles states that the mathematical model results indicate that the both information producer and lenders are most benefited by sharing savings from reduces information cost.