Author's School

Olin Business School

Author's Department/Program

Business Administration

Language

English (en)

Date of Award

January 2011

Degree Type

Dissertation

Degree Name

Doctor of Philosophy (PhD)

Chair and Committee

Armando Gomes

Abstract

My dissertation aims at understanding three critical issues confronting the financial world: contagion of a crisis, corporate governance, and credit rating. It contains four chapters. Through examining the contagion of a crisis, Chapter 1 presents a model in which the contagion of a liquidity crisis between two non-financial institutions occurs due to the learning within a common creditor pool. After creditors observe what occurs in a firm's rollover game, they conjecture each other's "type," or the attitude toward the risk of a firm's investment project. Creditors' inference of others' types then affects their own decisions with regard to the next firm that they lend to. Through the analysis of each firm's "incidence of failure" -- the threshold for a liquidity crisis -- I demonstrate that the risk of contagion rises in an important way if originating from a firm that ex-ante faces a small probability of failure. I also offer policy proposals to mitigate the severity of contagion in such liquidity crises. Then, Chapter 2 extends this contagion idea to delve into the effect of enhanced distribution of public information by the central bank on the contagion of a currency crisis between two countries. In the speculators' learning process about each other's aggressiveness in regard to the speculation as the contagion mechanism of a currency crisis, the impact of the contagion can be either negative or positive. Through the analysis of each country's threshold for a currency crisis, I show that the public signal distributed by the central bank promotes the positive effect of the contagion and reduces the negative effect of the contagion on the currency crisis from the other country. I also demonstrate that the effectiveness of the high precision of the public signal depends on the ex-ante expected state of the economic fundamentals of the country. Corporate governance is a major factor in determining the value of a firm. Hence, Chapter 3 examines how shareholders use the corporate governance structure -- managerial incentive scheme -- to maximize their utility in the product market competition. That is, we assess the effects of the competitive structure of a product market on a firm's corporate governance structure. We show that shareholders determine the corporate governance structure, including the manager's stock ownership and his governance power over the firm, in order to maximize their utility in the product market competition. We find that the manager's stock ownership would be lower and his governance power over the firm would be higher in cases in which the firm's product is more profitable or when competition in the product market is more severe. We also determine that the manager's stock ownership and his governance power would tend to be higher in cases in which the manager's private benefit of control tends to overly hurt the firm's value. Because a credit rating system is directly connected to the soundness of the whole corporate system, it is important to foster the competitive condition in the credit rating industry. Investigating the market structure of Korea's credit rating industry during 1995 -- 2000, Chapter 4 utilizes the Rosse-Panzar methodology to evaluate the Korean government's financial restructuring policy for fostering the competitive condition in the credit rating industry after the 1997 financial crisis. We find that the degree of market competition in the credit rating industry increased after the implementation of the Korean government's financial restructuring policy. Our analysis indicates that after the financial restructuring process the market structure of Korea's credit rating industry became an oligopoly in a contestable market, which is economically equivalent to the structure of perfect competition.

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Permanent URL: http://dx.doi.org/10.7936/K7X63K0V

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