Enhancing bank transparency: What role for the supervision authority?

We apply a three-tier hierarchical model of regulation, developed along the lines of Laffont and Tirole (1993), to an adverse selection problem in the corporate bond market. The bank brings the bonds to the market and informs the potential buyers about the bond risks; a unique benevolent public authority aims at maximising investors' welfare. The main goal is to investigate whether this unique authority is able to fully inform the market on a firm's true credit worthiness when banks, in order to recover doubtful credits, favour the placement of bonds issued by levered firms by concealing their true risk. By establishing the necessary conditions that allow optimal sanctions to produce the first best equilibrium, we show that the core problem of adverse selection in the corporate bond market does not lie so much in the benevolence of the delegated monitoring system, but rather in the possibility of affecting and sanctioning a firm's behavior.

Download Full-text

Adverse Selection and the Microstructure of the U.S. Corporate Bond Market

SSRN Electronic Journal ◽

10.2139/ssrn.2759766 ◽

2016 ◽

Author(s):

Alessio Ruzza

Keyword(s):

Adverse Selection ◽

Bond Market ◽

Corporate Bond ◽

Corporate Bond Market ◽

The U.S

Download Full-text

Moral Hazard Effects of Corporate Bond Guarantee Purchases: Empirical Evidence from China

Journal of Economics and Behavioral Studies ◽

10.22610/jebs.v10i5(j).2501 ◽

2018 ◽

Vol 10 (5(J)) ◽

pp. 100-115

Author(s):

Xueying Zhang ◽

Shansheng Gao ◽

Jian Jiao

Keyword(s):

Moral Hazard ◽

Empirical Evidence ◽

Adverse Selection ◽

Credit Rating ◽

Bond Market ◽

Corporate Bond ◽

Evidence Based ◽

Corporate Bond Market ◽

Selection Of ◽

Better Than

This study examines corporate bond guarantees by developing a theoretical model that decomposes the overall impact of a guarantee into signalling and incentive effects and presenting empirical evidence based on data from Chinaâ€™s corporate bond market. Our empirical research yields considerable evidence for the effects we posit in the model and provides some important insights into the problems of adverse selection and moral hazard in Chinaâ€™s bond market. The empirical evidence shows that the bond issuer with lower credit rating are more willing to purchase a bond guarantee and guaranteed bonds have a higher issue spread yield than those non-guaranteed bonds, even though both have the same bond credit rating. Our findings suggest that moral hazard would be better than adverse selection to explain the self- selection of bond guarantees. Prior to bond issuance credit rating signal provides a mechanism to mitigate information inequality, while bond guarantees relieve information asymmetry afterwards.

Download Full-text