Financial markets class ppt
FINA 3023
Financial Markets & Institutions
Class 15
Today s
Today’s class
The role of financial intermediaries
Brokers and dealers
Problems in (financial) markets:
Asymmetric i f
A
t i information ti Adverse selection
Moral hazard
Chapter 8 p 2
The market for “lemons” lemons When, in a market, sellers of a product know more
(asymmetric information) about it than the buyers, the market does not function properly. properly “The Market for Lemons: Quality Uncertainty and
The
the Market Mechanism” is a 1970 paper by the economist George Akerlof (who received the Nobel prize in 2001). i i 2001)
The paper discusses the consequences of information asymmetry in the market for used cars ( lemons ).
(“lemons”)
George Akerlof
3
Eight basic facts in finance
1.
1
2.
3.
4.
4
5.
6.
7.
8.
Stocks are not the most important sources of external financing for businesses Issuing marketable debt and equity securities is not the primary way in which businesses finance their operations
Indirect finance is many times more important than direct finance.
Financial intermediaries particularly banks, are the most important intermediaries, banks source of external funds used to finance businesses.
The financial system is among the most heavily regulated sectors of the economy
Only large, well-established corporations have easy access to securities markets to finance their activities
Collateral i
C ll t l is a prevalent feature of debt contracts for both l tf t f d bt t t f b th households and businesses.
Debt contracts are extremely complicated legal documents that place substantial restrictive covenants on borrowers. l b t ti l t i ti t b
4
Sources of External Funds for
Nonfinancial Businesses
Source: Andreas Hackethal and Reinhard H. Schmidt, “Financing Patterns: Measurement Concepts and Empirical Results,” Johann
Wolfgang Goethe Universitat Working Paper No. 125, January 2004. The data are
Financial Markets & Institutions
Class 15
Today s
Today’s class
The role of financial intermediaries
Brokers and dealers
Problems in (financial) markets:
Asymmetric i f
A
t i information ti Adverse selection
Moral hazard
Chapter 8 p 2
The market for “lemons” lemons When, in a market, sellers of a product know more
(asymmetric information) about it than the buyers, the market does not function properly. properly “The Market for Lemons: Quality Uncertainty and
The
the Market Mechanism” is a 1970 paper by the economist George Akerlof (who received the Nobel prize in 2001). i i 2001)
The paper discusses the consequences of information asymmetry in the market for used cars ( lemons ).
(“lemons”)
George Akerlof
3
Eight basic facts in finance
1.
1
2.
3.
4.
4
5.
6.
7.
8.
Stocks are not the most important sources of external financing for businesses Issuing marketable debt and equity securities is not the primary way in which businesses finance their operations
Indirect finance is many times more important than direct finance.
Financial intermediaries particularly banks, are the most important intermediaries, banks source of external funds used to finance businesses.
The financial system is among the most heavily regulated sectors of the economy
Only large, well-established corporations have easy access to securities markets to finance their activities
Collateral i
C ll t l is a prevalent feature of debt contracts for both l tf t f d bt t t f b th households and businesses.
Debt contracts are extremely complicated legal documents that place substantial restrictive covenants on borrowers. l b t ti l t i ti t b
4
Sources of External Funds for
Nonfinancial Businesses
Source: Andreas Hackethal and Reinhard H. Schmidt, “Financing Patterns: Measurement Concepts and Empirical Results,” Johann
Wolfgang Goethe Universitat Working Paper No. 125, January 2004. The data are