Credit quality, the intensity of regulation and the segmentation of debt markets

Research output: Contribution to journalArticlepeer-review

Abstract

Some debt markets have a "competitive advantage" over others due to easier regulatory requirements. Our model explains changes in the market shares of different debt markets. In particular, borrowers may choose between highly regulated and relatively unregulated placement of debt so as to minimize borrowing costs. Borrowers in the highly regulated market incur higher regulatory cost, but are also able to signal accurately their true risk class. In unregulated markets there is an asymmetric information problem. This results in an equilibrium where the debt market is segmented between less regulated and other, more strictly regulated, placements. Raising regulatory costs will lead to an expansion of the market share of unregulated debt. It will also lead to an increase in the overall default rate on corporate debt.

Original languageEnglish
Pages (from-to)431-449
Number of pages19
JournalResearch in Economics
Volume52
Issue number4
DOIs
StatePublished - Dec 1998

Keywords

  • Credit quality
  • Debt markets
  • Regulation

ASJC Scopus subject areas

  • Economics and Econometrics

Fingerprint

Dive into the research topics of 'Credit quality, the intensity of regulation and the segmentation of debt markets'. Together they form a unique fingerprint.

Cite this