Showing papers on "Financial risk published in 1977"

Financial Markets, Default, and Bankruptcy: The Role of the State

Abstract: If economists learn anything from the debate which has accompanied recent efforts to rewrite our bankruptcy law, it should be a sense of modesty about our bankruptcy system. As the product of hundreds of years of legal and political history, that system is a very sophisticated and complex institution. Much of the controversy over revising it has revolved about the judicial procedures and administration of the bankruptcy system. These are not subjects on which economists have a comparative advantage, and I shall for the most part behave accordingly. What economics can contribute to the study of bankruptcy is an analytical framework within which to clarify issues, identify more precisely the role which bankruptcy plays, and assess the social consequences of alternative legal structures. It is useful at the outset to divide the discussion into two major sub-areas: corporate bankruptcies and all others. The claims on corporations (stocks, bonds, etc.) and the markets in which those claims are traded are sufficiently different from the claims on individuals and noncorporate businesses and the credit markets which they employ to warrant separate attention. In general, claims on corporations do not extend to either the personal assets or wage and salary income of any of the participants. The rights of bondholders, stockholders, creditors, etc., are limited to the assets owned by the corporation. Personal or noncorporate-business borrowing similarly generates claims on the assets owned by the individuals or firms involved; but in addition, such borrowing leads to claims on flows generated by human capital-claims on the wages and salary of the borrower. This fact creates special problems. The market for human capital is distinctly different from markets for other kinds of capital. Very sophisticated markets have developed in which

On the Relations between Rates of Return, Risk, and Market Structure

Abstract: The study, 158.—"Interdependent risk" as legitimate risk, 161.—Exogenous versus endogenous risk and structure, 162.—Summary and conclusions, 163.

External Finance: A Necessary Component in Growth Projections for Southern Agriculture

Abstract: THE THEORETICAL MODEL income has been accompanied by large increases in The first portion of Penson's paper presents a outstanding debt. In view of rapidly rising asset theoretical or conceptual financial model of the farm values, many persons are currently asking whether the sector. It exposes his audience to one type of associated credit demands can be adequately accom- theoretical framework within which analysts at the modated within the present structure of lending research frontier of aggregate farm finance are institutions and arrangements. But at the same time, attempting to formulate their empirical explorations. wide fluctuations and a generally downward drift in But frankly, it is questionable whether the model farm income since 1973 are also leading analysts to plays, in this particular paper, the role apparently ask how borrowers and lenders alike can prepare for visualized by the author. periods in which normally useful financial leverage Penson states that he presents this model "to may be transformed into financial difficulty. While illustrate the channels through which the cost and Penson addresses both sets of concerns, this author's availability of debt and equity capital and increasing predilection to emphasize the latter leads one to financial risk can restrict the future rate of growth of believe that he performs the greater service in farm firms." This objective certainly goes to the heart documenting the significant relative increase in debt of his assigned topic. Let us, however, examine the incurred by Southern agriculture so far in the 1970s, discussion which accompanies the elements of the the dramatic lengthening of the payback periods that model. Necessarily each concept must be greatly relate outstanding debt to income, and the conse- abbreviated, but hopefully without undue distortion. quent rise in financial risk confronting both borEquations 1 through 4, he states, indicate that rowers and lenders. As he notes, increased risk capital stock is increased so long as the additions are reduces the optimum level of debt and suggests expected to more than pay for themselves. urgent research attention to farmer and lender Equation 5, he states, indicates that as demand adaptations involving a wide range of equity and for farm output increases, more capital stock is credit arrangements. His treatment of these subjects desired; as cost of capital increases, less capital stock