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Title: Issues in measurement and pricing of corporate lending risk
Author: Hack, Uwe
Awarding Body: University of Manchester
Current Institution: University of Manchester
Date of Award: 1992
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Although market efficiency is considered to be one of the foundations of modern finance theory and practice, several areas of research dealing with corporate lending markets are based upon the assumption of market inefficiency. The purpose of this study is to probe this issue with regard to three such research areas namely, (1) empirical failure prediction studies, (2) borrowing conditions of small firms and (3) theories of secured debt. In contrast to these studies, it was assumed that lending markets are efficient, in the sense that company specific characteristics are reflected in the conditions under which a firm can obtain borrowed funds and thus, the borrowing conditions cost of borrowed funds and proportion of secured debt were studied using different complementing research methods. With regard to failure prediction studies the results suggest that lenders recognize a firm in difficulties with considerable accuracy and within the time-framework used by failure prediction studies to demonstrate predictive abilities. Previous studies questioning the ex-ante value of failure prediction models and assuming market efficiency are thus supported. The sampling procedure of failure prediction studies was supported as far as industry effects are concerned but not with regard to size effects. Previously found differences in borrowing conditions of large and small firms were also found on a univariate basis here. However, within a multivariate framework no significant size-effect was found for the cost of borrowed funds. For the secured debt variable size effects were found after statistically controlling other influences, but this result could be explained by existing theoretical and empirical work. Three competing theoretical explanations of secured borrowing were examined and empirical evidence supported in general monitoring cost theories rather than theories based on asymmetric information (and thus market inefficiency) or redistribution effects. Overall, previously observed or implied inefficiency was not supported in most cases.
Supervisor: Not available Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available