scholarly journals Implications on households of bank's asset substitution

2010 ◽  
Author(s):  
Santiago Caicedo ◽  
David Perez-Reyna
Keyword(s):  
Asset Substitution

Accounting Transparency and the Asset Substitution Problem

2009 ◽  
Vol 84 (3) ◽  
pp. 689-712 ◽  
Author(s):  
Katrin Burkhardt ◽  
Roland Strausz
Keyword(s):  
Substitution Effect ◽  
Cost Accounting ◽  
Asset Substitution ◽  
Historical Cost ◽  
Optimal Capital Structure ◽  
Negative Effect ◽  
Optimal Capital ◽  
Positive Effect ◽  
Historical Cost Accounting ◽  
Debt Levels

ABSTRACT: We develop a model to show that transparent accounting can worsen the asset substitution effect of debt. This negative effect can outweigh the usual positive effect of transparency. We demonstrate this point by comparing pure historical cost accounting to the conservatively skewed accounting regime of lower-of-cost-or-market (LCM). In a market with asymmetric information, the two regimes lead to different degrees of transparency. The more transparent LCM regime produces more efficient results for firms with lower debt levels, while the opaque rule of pure historical cost accounting is preferable for higher debt levels. We explore the implications of this result for the firm's optimal capital structure.

Strategic Analysis of Risk-Shifting Incentives with Convertible Debt

2011 ◽  
Vol 01 (02) ◽  
pp. 293-321 ◽  
Author(s):  
Pascal François ◽  
Georges Hübner ◽  
Nicolas Papageorgiou
Keyword(s):  
Nash Equilibria ◽  
Noncooperative Game ◽  
Strategic Analysis ◽  
Risk Shifting ◽  
Convertible Debt ◽  
Asset Substitution ◽  
No Conversion

Convertible debt eliminates asset substitution in a one-period setting (Green, 1984). But convertible debt terms are usually set before the asset substitution opportunity. This allows shareholders and convertible debtholders to play a strategic noncooperative game. Two risk-shifting Nash equilibria are attainable: pure asset substitution when, despite no conversion, shareholders benefit from shifting risk, and strategic conversion when, despite early conversion, convertible debtholders expropriate wealth from straight debtholders. Even when initial convertible debt is designed to minimize the risk-shifting likelihood, the risk of asset substitution remains economically substantial — contrasting with the agency theoretic rationale for issuing convertible debt.

Asset Substitution and Structured Financing

2009 ◽  
Vol 44 (4) ◽  
pp. 911-951 ◽  
Author(s):  
Joel M. Vanden
Keyword(s):  
Continuous Time ◽  
Value Function ◽  
Third Party ◽  
Risk Shifting ◽  
Asset Substitution ◽  
Operating Strategy ◽  
Dynamic Setting ◽  
Asset Volatility ◽  
Debt Security ◽  
Locally Convex

AbstractThis article shows how structured financing can be used to solve the asset substitution problem in a dynamic setting. Structuring induces the firm’s owner to optimally choose the first best operating strategy even though the owner’s value function might be locally convex (concave), which would ordinarily lead to overinvestment (underinvestment) in risky projects. This result is demonstrated in two different continuous time settings—one that is based on the risk-shifting framework of Leland (1998) and one that generalizes the scaled return model of Green (1984). It is shown that the contractual nature of the structuring is a key determinant of the issuing firm’s dynamic asset volatility. Furthermore, unlike nonstructured financing, the default (conversion) probability of a structured debt security may be increasing (decreasing) in the firm’s total assets. Structured securities are therefore hedge assets, which potentially explains the popularity of structured securities among investors and third-party issuers.

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