The aim of this thesis is to analyse formal and informal credit in Ethiopia and Malawi. As credit markets in developing economies are dominated by informal institutions, the analysis of the interaction between formal and informal institutions is crucial to understanding how welfare improvements can be achieved. The thesis begins with an explanation of the motives for demanding credit. It then focuses on analysing the existence, diffusion and persistence of informal nance in developing economies. Much research on this topic remains hamstrung by the quality and availability of data and by the lack of empirical models, constraining the meaningful identification of the characteristics of the localities where informal institutions operate. The central idea of the first essay is to develop an empirical model that explains the determinants of participation in informal credit arrangements. We adopt an endogenous switching regression model of access to informal credit where the availability of a particular type of informal arrangement varies across clusters in rural Ethiopia. This strategy allows for taking into account substitutability between sources as well as household and cluster socioeconomic characteristics. The second essay exploits the idea that banks can crowd out informal borrowing in Malawi by creating microfinance institutions that acquire information in innovative ways. We adopt propensity score matching and find that the creation of a specific microfinance programme reduces informal borrowing. The third essay uses the credit limit variable to test liquidity constraints and the spillover hypotheses in Malawi. A ten percent increase in the informal credit line increases households' demand for informal credit by more than nine percent. We also find that a 10 percent increase in the credit limit of a microfinance programme reduces the informal demand by four percent, partly explaining the coexistence of formal and informal credit institutions.

Foreign direct investment (FDI) plays an important role in development strategies in developing countries. In particular, policy makers in developing countries and development agencies alike believe that FDI is growth enhancing, as suggested by their policy stand (in particular, promoting measures to facilitate and attract FDI). FDI is different from other types of capital flows as it involves not only the capital itself, but also transfers in the form of technology diffusion and skills, managerial expertise and know-how, and the introduction of new processing methods (Rodrik and Subramanian, 2008). These serve to modernize the recipient economy and support productivity gains, which in turn are expected to improve growth performance. The evidence of this thesis suggests that the flow of FDI in developing countries is likely to be affected by high debt, high inflation, and constraints on the executive (XCONST), market size and good infrastructure quality. However, the flow of FDI in Latin America and the Caribbean (LAC) is affected differently: infrastructure is more important (relative to developing countries) for the type of FDI attracted to LAC. The impact of FDI on growth is direct i.e. not conditional on other country characteristics, contrary to Alfaro et al. (2004), Hermes and Lensink (2003), and Borensztein et al. (1998) that argue that the effect of FDI on growth is conditional. However, LAC can boost economic growth by investing in human capital development, as FDI does not induce growth directly in LAC. FDI and growth are endogenously related, and the effect is bidirectional: from FDI to growth and from growth to FDI. Political instability affects growth, but the effect depends on the dimensions of political instability and appears to vary for different regions: instability of the regime and protest affect growth, while violence doesn’t appear to affect either growth or FDI, and the higher incidence of political instability in SSA affects growth differently in SSA relative to developing countries.

Credit ratings have become a widely accepted measure of firms’ creditworthiness in financial markets. Despite the significant growth of rating agencies, with a continuous reliance on credit ratings by regulators, investors and firms, prior academic literature generally tends to underestimate the relevance of credit ratings in firms’ financial decision-making. This thesis, therefore, provides a comprehensive analysis, which aims to examine the impact of external credit ratings on the financial structure decision-making of UK firms. The thesis has three empirical chapters. The first empirical chapter examines whether there are any systematic differences in firms’ levels of leverage across the rating levels which would suggest that the cost and benefits of credit ratings are material for such firms. The study finds that credit ratings are an important determinant of the capital structures of firms and that there is a strong non-linear inverted U-shaped relationship between credit ratings and capital structures. It is noted that rated firms have higher leverage than non-rated firms, but within the rated firms, leverage varies across the rating levels. High and low rated firms are found to have low leverage in their capital structures, and mid rated firms generally have higher leverage. Low gearing ratios may suggest that such firms have higher incentive to maintain their current ratings or to achieve upgrades, given the cost and benefits offered by credit ratings, than firms with high gearing ratios. The second empirical chapter investigates whether costs and benefits of credit ratings are material enough for potential and actual credit ratings changes to matter in the financial decision making of the firms. It does not appear from the empirical evidence that marginal changes in credit ratings possibly impose any serious costs on the rated UK firms. Whether credit ratings changes are potential or actual, they do not lead firms to follow any specific pattern with regards to their capital structure, which would suggest that firms are concerned about the marginal rating changes. Within the rating scale, however, some differences are noted among high and low rated firms. High (low) rated firms tend to issue (reduce) debt when they have a higher likelihood of upgrades. Similarly, high rated firms issue debt when they are actually upgraded or downgraded, while low rated firms are found only to reduce debt when they are upgraded indicating their efforts towards maintaining or achieving higher credit ratings. The third empirical chapter examines the influence of credit ratings on the debt maturity structure of UK firms by testing Diamond’s (1991) liquidity hypothesis. Consistent with the predictions, the results indicate that firms’ debt maturity structures are significantly influenced by their levels of refinancing risk, and that this refinancing risk induces a strong non-linear relationship between credit ratings and debt maturity structures. It appears that high rated firms possibly have low levels of refinancing risk, which allows them to select debt with short maturity. Low rated and non-rated firms are also found to have shorter debt maturities, despite being exposed to high levels of refinancing risk. It appears that these firms may have constrained access to long-term debt markets and, therefore, they have to rely mostly on short-term debt. Mid rated firms, however, have more long-term debt, which appears to be due to their better access to debt markets as well as their exposure to some degree of refinancing risk.

Berger and Udell (1990) made an important distinction between sorting-byobserved- risk (SBOR) and sorting-by-private-information (SBPI) as responses to asymmetric information in financing entrepreneurial ventures. The current research seeks not to distinguish, but to integrate, these responses in what is called Signalling and Self-Selection (SASS) model. By developing Bester’s (1985) model, the SASS model is one in which the type (high or low) of the entrepreneur is private information known only to the entrepreneur and the bank offers a menu of contracts as a self-selection mechanism. The SASS model proposes that high-type entrepreneurs, who have a high probability of success and high project returns, are more likely to choose a contract with high collateral but low interest rate. Low-type entrepreneurs, who have a low probability of success and low project returns, are more likely to choose a contract with low collateral but high interest rate. The SASS model predicts that the arrangement and choice of debt contracts is influenced by loan characteristics, signals transferred by entrepreneurs and the relationship between the entrepreneur and the bank. The 1998 U.S. Survey of Small Business Finances is used to empirically test the hypotheses derived from the SASS model. This research includes, for the first time, many personal characteristics of the entrepreneur in regressions seeking to explain collateralisation and interest rates. The empirical results imply that both the signalling process and the self-selection mechanism influence the outcome of entrepreneurial debt finance, which in turn depends on the scale of asymmetric information. Less risky entrepreneurs are more likely to pledge collateral, suggesting that private information strongly influences the collateralisation decision. It also seems that the signals of the entrepreneur are as important as the signals of the business, since entrepreneurs with ‘good’ signals enjoy more favourable contracts than those with ‘bad’ signals. The evidence from this thesis emphasises that there are considerable returns to the ‘good’ entrepreneur, in conditions of asymmetric information, in signalling her ability to the lender. Moreover, it also finds that relationship lending significantly reduces the interest rates charged on loans. Another contribution of this research is that, by investigating discouraged borrowers, it empirically examines the degree of problem of information asymmetries in small business financial markets, on which the above hypotheses tests are based. This research, for the first time, reports evidence that information asymmetries influence the discouragement of high-risk and low-risk small business from applying external finance in opposite directions. It also suggests that small business financial markets are informationally efficient because bad borrowers are more likely to be discouraged by symmetric information than good borrowers by asymmetric information.

This dissertation examines whether ethical investment funds are good investments in comparison with other stock market investments for individual investors. Firstly, the financial performance of ethical funds was analysed using traditional risk adjusted performance measures. Performance was first compared with market benchmarks and then in comparison with other funds using a 'matched pair' approach (Luther, Matatko and Corner 1992; Mallin, Saadouni and Briston, 1995; Gregory, Matatko and Luther, 1997). This analysis indicated that the financial performance of ethical funds was not significantly different from market benchmarks and other funds. It was therefore concluded that ethical funds were good investments financially. A second empirical study used field research to examine the policies and processes of ethical funds. Two complementary strategies for dealing with ethical issues were identified; screening and engagement. Screening involves the use of exclusionary and/or positive ethical criteria in the stock selection process. This study indicated that ethical funds had a number of processes in place to address ethical issues. These processes included ethical screening; ethical advisory committees; specialist ethical researchers and use of other organisations. In terms of the policies and processes employed by ethical funds they were "good" investments compared to other funds. This confirms previous findings that ethical funds, although not a "panacea" were an improvement over other funds and that some ethical funds engaged with firms on ethical issues (Cowton, 1999; Mills, 2000; Friedman and Miles, 2001). Finally, ethical history and Church perspectives are employed in a tentative analysis of whether ethical funds are good investments ethically (Mackenzie, 1997). This preliminary analysis made it clear that some ethical funds would not be good investments in a moral sense for certain investors.

In this dissertation we study the indifference buyer's price and the indifference seller's price of an uncertainty averse decision-maker and the characterization of a decision maker's attitudes toward uncertainty. In the first part of the dissertation we study the properties fulfilled by the indifference buyer's price and by the indifference seller's price of an uncer- tainty averse decision-maker. We find that the indifference buyer's price is a quasiconvex risk measure and that the indifference seller's price is a cash-additive convex risk measure. We identify the acceptance family of the indifference buyer's price as well as the acceptance set of the indifference seller's price. We characterize the dual representations of the indifference buyer's price and of the indifference seller's price both in terms of probabil- ity charges and in terms of probability measures. In the second part of the dissertation we study the characterization of a decision-maker's attitudes toward uncertainty in terms of the indifference buyer's price and of the indifference seller's price. We find that a decision- maker is more uncertainty averse than another if and only if her indifference buyer's price and her indifference seller's price are larger than for the other. We find that a decision-maker is increasingly (respectively, decreasingly, con- stantly) uncertainty averse if and only if her indifference buyer's price and her indifference seller's price are increasing (respectively, decreasing, con- stant) functions of her constant initial wealth. In the last part of the dissertation we further develop the characterization of increasing, decreasing, and constant uncertainty aversion and we derive a technical condition that allows to immediately verify whether an uncer- tainty averse representation of preferences exhibits increasing, decreasing, or constant uncertainty aversion. We find that this technical condition allows 6to classify a large class of uncertainty averse representations of preferences into increasingly, decreasingly, and constantly uncertainty averse.

The thesis consists of three chapters that investigate informational asymmetry mechanisms surrounding financial institutions. In the first chapter, my co-authors and I develop a theoretical model to analyse the effect of competition on the conflict of interest arising from the issuer pay compensation model of the credit rating industry. We find that relative to monopoly, rating agencies are more likely to inflate ratings under competition, resulting in lower expected welfare. These results do not depend on the presence of ratings shopping, but instead focus on the trade-off between maintaining reputation (to increase profits in the future) and inflating ratings today (to increase current profits). In the second chapter, I document a direct link between stock mispricing, as proxied by mutual fund flow-driven price pressure, and corporate investment. One standard deviation increase in stock price pressure leads to an increase of 1.3 percent in investment. High price pressure firms with high investments have lower future stock returns and lower future operational performance than high price pressure firms with low investments. Investment sensitivity to price pressure is stronger for firms that are less financially constrained, firms with high churn rates (shorter horizon) and firms with high R&D intensity (with more opaque assets). Finally, investment sensitivity to price pressure remains positive and significant for firms that do not engage in seasoned equity offerings around the investment period, suggesting there is a channel between stock price pressure and corporate investment that is independent of external financing. The third chapter documents a pronounced market timing ability of institutional investors when it comes to selling individual stocks. Based on more than 8 million institutional trades over the period 1999 to 2009, my co-authors and I document that (i) large (block) sales of institutional investors correlate with future negative excess returns, while stock purchases do not predict positive excess returns at the stock level,(ii) the one-sided successful market timing of block liquidations is more pronounced if the block represents a larger share of the investor portfolio or/and the stock capitalization, (iii) international investors have a weaker one-sided timing ability for block liquidations. The evidence strongly supports the hypothesis that proximity of block holding investors to management provides important inside information advantages.

How do we explain divergent trajectories of change in wage bargaining institutions? The advancement of European economic integration, leading to markets liberalisation and increased competition, was expected to bring the breakdown of centralised bargaining arrangements. This expectation was even stronger given the internationalisation of new management practices, pushing European firms to enhance their competitiveness via increasing flexibility. Despite strong theoretical expectations towards a generalised breakdown of wage bargaining, one finds divergent trajectories of change across European countries and sectors. The task of this thesis is to explain the puzzle of varied responses in otherwise similar sectors. Banking and telecommunications sectors in Italy and Greece display a diversity of paths of institutional change: breakdown of bargaining, reform of bargaining, successful centralisation, and failed centralisation. The direction of the paths of institutional change may be explained in large part by two factors ignored by earlier literature: ‘employer associability’ and ‘labourstate coalitions’. On the one hand, it is argued that employers associations which possess the legal competence and take into account the collective interests of both large and smaller firms, may reform the wage bargaining institution, getting the ‘best of both worlds’ for their members. Additionally, a ‘labour-state coalition’ may moderate the destabilising pressures to wage bargaining, as long as trade unions are able to speak with a ‘single voice’. The government will not only be motivated by electoral concerns, but also support centralised bargaining to gain ‘room for manoeuvre’ for tactical policy trade-offs advancing its agenda. Overall, the thesis refines earlier propositions, suggesting a more nuanced causal mechanism to explain institutional change. The argument speaks to wider debates in comparative political economy and comparative employment systems; it fleshes out empirically the role of the state in Mediterranean capitalism and highlights factors that moderate pressures to convergence to the Liberal Market model.

This thesis investigates competitiveness of banking market in Indonesia and monetary policy transmission during the period 2000 to 2009. As has been the case for most previous structure-performance studies, the results using the SCP specification are not very robust. When PR approach is used, as done in other studies, it reveals much evidence of imperfect competition in Indonesian provincial markets. The estimated values of H-statistics for the sample period 2001-2008 are positive ranging between 0.31 - 0.62 which is consistent with the study by Claessens and Laeven (2004). We find that the market in Java and Sumatra is more competitive than metropolitan and the periphery. H-statistic of metropolitan and the periphery are 0.31 and 0.52 respectively while Java and Sumatra is 0.62. However, the weakness of PR modeling is that it does not tell us much about the sources of imperfect competition, what can be done to change matters. The estimation using ES hypothesis specification does not also reveal significant influence of the geography of Indonesia. Although there is a modest impact of the geography of Indonesia on the level of competition, the development that help overcome geographical barriers, e.g. new banking technologies can usefully promote competition in Indonesian deposit markets. In measuring the efficiency of the Indonesian banks, we find that the mean of cost-efficiency was in the range of 40%-50%. State-owned banks were found to be relatively more cost-efficient than foreign banks. The analysis suggests several conclusions about banking efficiency in Indonesia. Firstly, foreign ownership has positive effect on improved cost efficiency of the banks. However, the changing effect is small. Secondly, it appears that although old foreign banks are able to maintain comparable efficiency to the new acquired foreign banks, old foreign banks’ efficiency tend to worsen. They need to hire more skilled workers and install better working environments. Finally the result of the role of banks in monetary policy in Indonesia shows that there is an operative lending channel in Indonesia. We also find evidence that large banks are more responsive, while high liquidity and high capitalization banks are less responsive to the changes in monetary policy.

Credit spreads are important financial tools, since they are used as indicators of economic progression, investment decisions, trading and hedging, as well as pricing credit derivatives. Their role has become more significant for the European fixed income markets since the introduction of the Euro, which reshaped the mechanics of the financial environment. The introduction of single currency provided the means for a pan-European economic growth and cross-border development, liberalized a vast inflow of capital which was once fragmented into different currencies, and provided the dynamics of cross-border investments around a unified legislative framework. Thus, the main subject of the thesis is to provide further insight into and investigate the nature and the dynamics of credit spreads of European corporate bond indices during the credit crisis period. Traditional quantitative credit risk models assume that changes in spreads are normally distributed but empirical evidence shows that they are likely to be skewed and fat-tailed, and if they are ignored then the calculation of loss probabilities will be seriously compromised. Therefore, the first area of investigation aims to provide further insight into the dynamics of higher moments and regime shifts in credit spread changes by applying a GARCH-type model that allows for time-varying volatility, skewness and kurtosis, as well as a Markov regime-switching GARCH specification to capture the structural changes in the volatility of credit spreads. Furthermore, a comparison of the different specifications is undertaken in order to assess which model better fits the empirical distribution of the data and produces best Value-at-Risk estimates. The results presented have significant implications for risk management, as well as in the pricing of credit derivatives. The second area of investigation is to assess and evaluate time-varying correlation of credit spreads. Different multivariate GARCH models, such as Orthogonal-GARCH, the Constant and Dynamic Correlation GARCH models, Risk Metrics and Diagonal-BEKK, are applied to examine the behaviour and dynamics of time-varying correlation. Additionally, the performance of the proposed models is examined by determining whether they produce accurate VaR estimates. The study finds evidence in support of time-varying correlation coefficients between credit spreads which appears to be market dependent and has implications for pricing of derivatives, portfolio selection, trading and hedging activities, as well as risk management. Finally, the impact of economic determinants of credit spreads such as the risk-free rate, inflation, as well as equity and commodity indices and volatilities, are investigated over different market conditions using regime switching models. The results highlight how the effect of the determinants on credit spreads varies across different market conditions and point to the existence of non-linear relationship between the determinants and credit spread changes. The study reveals that the regime dependent determinants have significant explanatory power only in the high volatility regime. Finally, it is shown that the feed-forward neural network model out-performs the other specifications applied in this study in terms of estimating out-of-sample mean forecasts.