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Security by Design

01 Jan 2018-pp 225
TL;DR: In supermarkets, food manufacturers fight – even pay – to get the best locations for their products: at eye level, or at the ends of aisles, where they better attract the attention of questing shoppers and therefore are more likely to be bought.
Abstract: In supermarkets, food manufacturers fight – even pay – to get the best locations for their products: at eye level, or at the ends of aisles, where they better attract the attention of questing shoppers and therefore are more likely to be bought. In software, designers have long known that most users do not change default settings. This is most easily seen in disputes about whether default privacy settings should opt users in or out. In 2008, the popular book Nudge, written by Richard R. Thaler and Cass R. Sunstein, focused mainstream attention on the years of this type of research, and dubbed the design of systems to nudge people toward particular behaviours that benefit both them and society in general “choice architecture” and the designers who make these apparently tiny but vastly influential decisions “choice architects”.
Citations
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Journal ArticleDOI
TL;DR: This paper investigated the mechanisms behind the matching of banks and firms in the loan market and the implications of this matching for the provision of credit and found that bank-dependent firms borrow from well capitalized banks, while firms with access to the bond market borrow from banks with less capital.
Abstract: This paper investigates the mechanisms behind the matching of banks and firms in the loan market and the implications of this matching for the provision of credit. I find that bank-dependent firms borrow from well capitalized banks, while firms with access to the bond market borrow from banks with less capital. This matching improves access to credit during a crisis by pairing bank-dependent firms with stable banks. During the 2008 Financial Crisis, bank-dependent borrowers faced significantly greater loan supply from their relationship banks than they would have without this matching.

76 citations


Cites background from "Security by Design"

  • ...also induces shareholders to monitor bank management (Boot and Thakor 1993). Allen, Carletti, and Marquez (2011) directly predict that firms for which monitoring adds value should prefer to borrow from well capitalized banks....

    [...]

  • ...also induces shareholders to monitor bank management (Boot and Thakor 1993). Allen, Carletti, and Marquez (2011) directly predict that firms for which monitoring adds value should prefer to borrow from well capitalized banks. Small and informationally opaque firms benefit from the certification provided by diligent screening and monitoring, so based on theories of capital-induced monitoring, they prefer well capitalized banks. I refer to this as the equity monitoring hypothesis. Boot, Greenbaum, and Thakor (1993) study when it is optimal for banks to renege on loan commitments, showing that financially strong banks are more likely to honor loan commitments. Bank-dependent firms value the bank’s ability to honor its loan commitments because it is costly for them to substitute to other sources of capital. Ivashina and Scharfstein (2010) find that this is an empirically relevant concern, as borrowers of Lehman Brothers drew down their credit lines to ensure they had access to those funds....

    [...]

  • ...also induces shareholders to monitor bank management (Boot and Thakor 1993). Allen, Carletti, and Marquez (2011) directly predict that firms for which monitoring adds value should prefer to borrow from well capitalized banks. Small and informationally opaque firms benefit from the certification provided by diligent screening and monitoring, so based on theories of capital-induced monitoring, they prefer well capitalized banks. I refer to this as the equity monitoring hypothesis. Boot, Greenbaum, and Thakor (1993) study when it is optimal for banks to renege on loan commitments, showing that financially strong banks are more likely to honor loan commitments. Bank-dependent firms value the bank’s ability to honor its loan commitments because it is costly for them to substitute to other sources of capital. Ivashina and Scharfstein (2010) find that this is an empirically relevant concern, as borrowers of Lehman Brothers drew down their credit lines to ensure they had access to those funds. The financial commitment hypothesis predicts that bank-dependent firms borrow from well capitalized banks. Another line of work focuses on the bank’s risk management problem. Gornall and Strebulaev (2014) model the joint capital structure decision of the bank and its borrowers....

    [...]

  • ...also induces shareholders to monitor bank management (Boot and Thakor 1993). Allen, Carletti, and Marquez (2011) directly predict that firms for which monitoring adds value should prefer to borrow from well capitalized banks. Small and informationally opaque firms benefit from the certification provided by diligent screening and monitoring, so based on theories of capital-induced monitoring, they prefer well capitalized banks. I refer to this as the equity monitoring hypothesis. Boot, Greenbaum, and Thakor (1993) study when it is optimal for banks to renege on loan commitments, showing that financially strong banks are more likely to honor loan commitments....

    [...]

Journal ArticleDOI
TL;DR: In this article, the authors studied the key drivers of security design in the residential mortgage-backed security (RMBS) market during the run-up to the subprime mortgage crisis and showed that deals with a higher level of equity tranche have a significantly lower delinquency rate conditional on observable loan characteristics.
Abstract: We study the key drivers of security design in the residential mortgage-backed security (RMBS) market during the run-up to the subprime mortgage crisis. We show that deals with a higher level of equity tranche have a significantly lower delinquency rate conditional on observable loan characteristics. The effect is concentrated within pools with a higher likelihood of asymmetric information between deal sponsors and potential buyers of the securities. Further, securities that are sold from high-equity-tranche deals command higher prices conditional on their credit ratings. Overall, our results show that the goal of security design in this market was not only to exploit regulatory arbitrage, but also to mitigate information frictions that were pervasive in this market.

59 citations


Cites background from "Security by Design"

  • ...3See Gorton and Pennacchi (1990), Boot and Thakor (1993), Riddiough (1997), DeMarzo and Duffie (1999), DeMarzo (2005), Hartman-Glaser, Piskorski, and Tchistyi (2011), and Chemla and Hennessy (2014) for a rigorous theoretical treatment of this issue. of the first descriptive statistics on important…...

    [...]

Journal ArticleDOI
TL;DR: The global Islamic finance industry is estimated to be worth approximately US $14 trillion, and has grown much faster than conventional finance over the past four decades as discussed by the authors Although 80% of this industry is concentrated in the Middle East, North Africa, East Asia, and the Pacific, it is active in 59 countries across all continents.
Abstract: The global Islamic finance industry is estimated to be worth approximately US $14 trillion, and has grown much faster than conventional finance over the past four decades Although 80% of this industry is concentrated in the Middle East, North Africa, East Asia, and the Pacific, it is active in 59 countries across all continents Formally launched in the 1970s, this industry has deep roots in Islamic law (Sharia) and offers many implications for modern finance In this survey, we explore key aspects of Islamic financing through banking, capital markets, and private contracting Our objective is to attract the attention of academic researchers, regulators and standard setters, and providers/users of Islamic funding to the critical issues related to the efficiency of Islamic finance

41 citations


Cites background from "Security by Design"

  • ...Boot and Thakor (1993) consider a noisy rational expectations model in which firms find it optimal to split their cash flows into safe (debt) and risky (equity) components....

    [...]

Journal ArticleDOI
TL;DR: In this paper, the role of management ethics in the perception of big baths was examined, using linguistic analysis on earnings-conference calls to measure managerial deception and employing a difference-in-differences research design with propensity score matching.
Abstract: Accounting big baths are pervasive in practice. While big baths can improve the information environment and reduce information asymmetry, they can also degrade the information environment and obscure operating performance. In this study, we examine the role of management ethics. Specifically, we investigate whether managers’ truthfulness (or conversely, deceptiveness) affects how investors perceive big baths. Using linguistic analysis on earnings-conference calls to measure managerial deception and employing a difference-in-differences research design with propensity-score matching, we find that information asymmetry is significantly higher following big baths taken by deceptive CEOs, compared with big baths taken by less deceptive CEOs.

37 citations

Journal ArticleDOI
TL;DR: In this article, the authors study complexity in the market for securitized products, a market in which it is easy for buyers to observe prices but difficult to observe product quality, and find that securities in more complex residential MBS deals default more.
Abstract: Sellers of products can increase buyers' search costs by obfuscating either the price or the quality of the product. We study complexity in the market for securitized products, a market in which it is easy for buyers to observe prices but difficult to observe product quality. We find that securities in more complex residential MBS deals default more. The higher likelihood of default is economically meaningful: a one standard deviation increase in complexity represents a 17% increase in default on AAA securities. However, yields of more complex securities are not higher indicating that investors do not perceive them as riskier.

35 citations

References
More filters
Journal ArticleDOI
TL;DR: This paper investigated the mechanisms behind the matching of banks and firms in the loan market and the implications of this matching for the provision of credit and found that bank-dependent firms borrow from well capitalized banks, while firms with access to the bond market borrow from banks with less capital.
Abstract: This paper investigates the mechanisms behind the matching of banks and firms in the loan market and the implications of this matching for the provision of credit. I find that bank-dependent firms borrow from well capitalized banks, while firms with access to the bond market borrow from banks with less capital. This matching improves access to credit during a crisis by pairing bank-dependent firms with stable banks. During the 2008 Financial Crisis, bank-dependent borrowers faced significantly greater loan supply from their relationship banks than they would have without this matching.

76 citations

Journal ArticleDOI
TL;DR: In this article, the authors studied the key drivers of security design in the residential mortgage-backed security (RMBS) market during the run-up to the subprime mortgage crisis and showed that deals with a higher level of equity tranche have a significantly lower delinquency rate conditional on observable loan characteristics.
Abstract: We study the key drivers of security design in the residential mortgage-backed security (RMBS) market during the run-up to the subprime mortgage crisis. We show that deals with a higher level of equity tranche have a significantly lower delinquency rate conditional on observable loan characteristics. The effect is concentrated within pools with a higher likelihood of asymmetric information between deal sponsors and potential buyers of the securities. Further, securities that are sold from high-equity-tranche deals command higher prices conditional on their credit ratings. Overall, our results show that the goal of security design in this market was not only to exploit regulatory arbitrage, but also to mitigate information frictions that were pervasive in this market.

59 citations

Journal ArticleDOI
TL;DR: The global Islamic finance industry is estimated to be worth approximately US $14 trillion, and has grown much faster than conventional finance over the past four decades as discussed by the authors Although 80% of this industry is concentrated in the Middle East, North Africa, East Asia, and the Pacific, it is active in 59 countries across all continents.
Abstract: The global Islamic finance industry is estimated to be worth approximately US $14 trillion, and has grown much faster than conventional finance over the past four decades Although 80% of this industry is concentrated in the Middle East, North Africa, East Asia, and the Pacific, it is active in 59 countries across all continents Formally launched in the 1970s, this industry has deep roots in Islamic law (Sharia) and offers many implications for modern finance In this survey, we explore key aspects of Islamic financing through banking, capital markets, and private contracting Our objective is to attract the attention of academic researchers, regulators and standard setters, and providers/users of Islamic funding to the critical issues related to the efficiency of Islamic finance

41 citations

Journal ArticleDOI
TL;DR: In this paper, the role of management ethics in the perception of big baths was examined, using linguistic analysis on earnings-conference calls to measure managerial deception and employing a difference-in-differences research design with propensity score matching.
Abstract: Accounting big baths are pervasive in practice. While big baths can improve the information environment and reduce information asymmetry, they can also degrade the information environment and obscure operating performance. In this study, we examine the role of management ethics. Specifically, we investigate whether managers’ truthfulness (or conversely, deceptiveness) affects how investors perceive big baths. Using linguistic analysis on earnings-conference calls to measure managerial deception and employing a difference-in-differences research design with propensity-score matching, we find that information asymmetry is significantly higher following big baths taken by deceptive CEOs, compared with big baths taken by less deceptive CEOs.

37 citations

Journal ArticleDOI
TL;DR: In this article, the authors study complexity in the market for securitized products, a market in which it is easy for buyers to observe prices but difficult to observe product quality, and find that securities in more complex residential MBS deals default more.
Abstract: Sellers of products can increase buyers' search costs by obfuscating either the price or the quality of the product. We study complexity in the market for securitized products, a market in which it is easy for buyers to observe prices but difficult to observe product quality. We find that securities in more complex residential MBS deals default more. The higher likelihood of default is economically meaningful: a one standard deviation increase in complexity represents a 17% increase in default on AAA securities. However, yields of more complex securities are not higher indicating that investors do not perceive them as riskier.

35 citations

Trending Questions (3)
What role does product design play in ensuring data security for consumers?

The provided paper does not mention the role of product design in ensuring data security for consumers.

Is there an example where Security by Design historically was important?

The paper does not provide an example of when Security by Design was historically important. The paper discusses the concept of "choice architecture" in software design.

What are examples where Security by Design helped?

The provided paper does not mention any specific examples where Security by Design helped. The paper discusses the concept of "choice architecture" in software design but does not provide specific examples related to security.