The Dec-09 Reporter carries a very useful summary of the research done in NBER’s Corporate Finance Program. It is written by Raghuram Rajan who directs the program. Usually, the reporter carries a survey of the program but Rajan prefers to focus on the papers that help us understand the current crisis.
The NBER’s Program on Corporate Finance was founded in 1991, and has initiated some very promising avenues of research since then. Narrowly interpreted, corporate finance is the study of the investment and financing policies of corporations. Because firms are at the center of economic activity, and almost any topic of concern to economists –from microeconomic issues like incentives and risk sharing to macroeconomic issues such as currency crises — affects corporate financing and investment, it is however increasingly difficult to draw precise boundaries around the field.
The range of subjects that Corporate Finance Program members have addressed in their research reflects this broad scope. Rather than offering a broad brush survey of all the work currently being done, however, I thought it would be most useful to focus on what our researchers have contributed to the analysis of the ongoing financial crisis. Even here, I have had to be selective, given the large number of papers on this subject in the last two years. I should also note that even prior to the crisis, Corporate Finance Program members had done important work on such topics as credit booms, illiquidity, bank runs, and credit crunches. This work laid much of the foundation for the more recent analyses. In the interests of space, though, I will not survey that earlier work.
He says there is some consensus on causes of the crisis:
A number of papers offer an overview of the crisis (Brunnermeier, 14612; Diamond and Rajan, 14739; Gorton, 14398). There is some consensus on its proximate causes: 1) the U.S. financial sector financed low-income borrowers who wanted to buy houses, and it raised money for such lending through the issuance of exotic new financial instruments; 2) banks seemed very willing to take risks during this time, and a significant portion of these instruments found their way, directly or indirectly, into commercial and investment bank balance sheets; 3) these investments were largely financed with short-term debt. But what were the more fundamental reasons for these proximate causes?
He then explores papers which look at these causes. He covers papers in 7 broad heads:
- Why Low Income Borrowers?
- Were banks more willing to take risks?
- Financing with Short-Term Debt
- The Panic and Fire Sales
- The Rescue Efforts
- What did not cause the panic?
- Other Issues
Very good literature survey from Rajan. I mean you have all the major papers that are cited to explain the crisis in one place. And then you know what each paper attempts to say.
Highly recommended reading.