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Idiosyncratic Uncertainty, Asymmetric Information, and Private Credit

  • Santiago Acosta-Ormaechea
  • Atsuyoshi Morozumi
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    We propose firm-specific (idiosyncratic) uncertainty as a key cross-country determinant of the total credit allocated to the private sector. We show that in the presence of informational asymmetry in the credit market, theory suggests that higher uncertainty lowers the ratio of private credit to output by reducing the former proportionally more than the latter. Output falls because the higher uncertainty enlarges economic distortions and reduces aggregate capital accumulation. Credit falls proportionally more because the higher uncertainty allows firms to earn larger rents and increases their internal funds, while it reduces the overall financing required in the lower output environment. Thus, a country with higher idiosyncratic uncertainty is characterized by a lower credit-to-output ratio. We show that this theoretical prediction is supported by regression analysis.

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    File URL: http://www.nottingham.ac.uk/cfcm/documents/papers/12-12.pdf
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    Paper provided by University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM) in its series Discussion Papers with number 12/12.

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    Handle: RePEc:not:notcfc:12/12
    Contact details of provider: Postal: School of Economics University of Nottingham University Park Nottingham NG7 2RD
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    1. Ben S. Bernanke, 1980. "Irreversibility, Uncertainty, and Cyclical Investment," NBER Working Papers 0502, National Bureau of Economic Research, Inc.
    2. Jeremy Greenwood & Juan M. Sanchez & Cheng Wang, 2007. "Financing Development: The Role of Information Costs," NBER Working Papers 13104, National Bureau of Economic Research, Inc.
    3. Beck, Thorsten & Levine, Ross & Loayza, Norman, 2000. "Finance and the sources of growth," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 261-300.
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    5. Tullio Jappelli & Marco Pagano, 1999. "Information Sharing, Lending and Defaults: Cross-Country Evidence," CSEF Working Papers 22, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    6. Shleifer, Andrei & McLiesh, Caralee & Hart, Oliver & Djankov, Simeon, 2008. "Debt Enforcement Around the World," Scholarly Articles 2961825, Harvard University Department of Economics.
    7. Pagano, Marco & Jappelli, Tullio, 1993. " Information Sharing in Credit Markets," Journal of Finance, American Finance Association, vol. 48(5), pages 1693-1718, December.
    8. Rui Castro & Gian Luca Clementi & Glenn MacDonald, 2004. "Legal Institutions, Sectoral Heterogeneity, and Economic Development," 2004 Meeting Papers 162, Society for Economic Dynamics.
    9. Evans, David S, 1987. "The Relationship between Firm Growth, Size, and Age: Estimates for 100 Manufacturing Industries," Journal of Industrial Economics, Wiley Blackwell, vol. 35(4), pages 567-81, June.
    10. Warner, Jerold B, 1977. "Bankruptcy Costs: Some Evidence," Journal of Finance, American Finance Association, vol. 32(2), pages 337-47, May.
    11. Simeon Djankov & Caralee McLiesh & Andrei Shleifer, 2005. "Private Credit in 129 Countries," NBER Working Papers 11078, National Bureau of Economic Research, Inc.
    12. Williamson, Stephen D, 1987. "Financial Intermediation, Business Failures, and Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 95(6), pages 1196-1216, December.
    13. Rüdiger Bachmann & Christian Bayer, 2011. "Uncertainty Business Cycles - Really?," NBER Working Papers 16862, National Bureau of Economic Research, Inc.
    14. King, Robert G. & Levine, Ross, 1993. "Finance, entrepreneurship and growth: Theory and evidence," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 513-542, December.
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