Finance: The pitfalls of pledgeable cash flows
Published: 12 January 2022
19 January. Professor Konstantinos Koufopoulos, University of York
Professor Konstantinos Koufopoulos, University of York
'The pitfalls of pledgeable cash flows: soft budget constraints, zombie lending and under-investment'
Wednesday 19 January, 1pm - 2.15pm
Zoom online seminar
Abstract
We show that when borrowers are privately informed about their creditworthiness and lenders have a soft budget constraint, efficient investment requires a limit on the fraction of a firm's cash flows that can be pledged to outsiders. That is, pledgeability should neither be too low nor too high. An increase in pledgeability, or, more broadly, creditor rights, can either promote re-investment in zombie firms, which increases other firms' cost of capital, or it can lead to inefficient underinvestment, depending on the composition of equilibrium credit demand. Thus, greater pledgeability can reduce net social surplus, and even trigger a Pareto loss.
Biography
Konstantinos Koufopoulos is a Professor/Chair in Economics and Finance in the Department of Economics and Related Studies at the University of York. His research interests lie primarily in Banking, Corporate Finance and Contract Theory. He is also a Referee for American Economic Review, Economic Journal, Economic Theory, Economica, European Economic Review, Journal of Banking and Finance, Journal of Economic Behavior and Organization, Journal of Mathematical Economics, Journal of Money, Credit and Banking, Games and Economic Behavior and Review of Economic Studies, Social Choice and Welfare.
Further information: business-events@glasgow.ac.uk
First published: 12 January 2022
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