Adverse Selection Theory Research Articles

Financial Technology and Financial Inclusion in the Banking industry in Kenya

Financial technology (Fintech) marked by technological developments in financial services, has become a significant player in the world of finance. It has the potential to increase financial services’ availability and affordability, particularly for marginalized people. The main purpose of this study was to establish the effect of Fintech on financial inclusion in the banking sector in Kenya. The proposed objectives are: to determine the effect of mobile money on financial inclusion in the banking sector in Kenya and to evaluate the role of mobile banking on financial inclusion in the banking sector in Kenya. This study was grounded in financial intermediation theory and information asymmetry and adverse selection theory. This study employed desktop research methodology. This study adds to the debate on how technology and finance intersect, opening the door for additional investigation of creative solutions for financial inclusion while promoting the attainment of sustainable development goals and sustainable development. This study established that mobile money greatly improves financial inclusion by reducing gaps for disadvantaged groups and boosting accessibility, especially in rural areas with limited traditional banking infrastructure. This study also found that mobile money services greatly improve financial inclusion in Kenya's banking sector, particularly in rural areas, by democratizing access to financial services and closing gaps for underserved populations. Furthermore, by improving accessibility, security, and efficiency, mobile banking significantly advances financial inclusion. The study recommends that regulators, financial institutions, and mobile money service providers in Kenya should work together to promote innovation and competition in the mobile banking sector.

Risk Management and Financial Performance of Commercial Banks Listed at the Nairobi Securities Exchange

Purpose: In order to reduce any negative consequences on their performance, it is essential for financial institutions to achieve a balance between risk and return. Organizations with effective risk management practices are more likely to succeed in achieving their operational business objectives. 2013 saw a review of commercial bank laws by the Central Bank of Kenya. As a result of these reviews, certain banks began to experience difficulties with their financial performance. Chase Bank and Imperial Bank, for instance, were placed under receivership in 2015 and 2016, respectively. So the question is, was bad financial management influenced by risk management? This was the impetus behind the study's primary goal, which was to ascertain how risk management and the financial success of banks listed on the NSE interacted. The study's specific goals included figuring out how operational risk management affects financial performance, as well as how liquidity risk management affects financial performance, credit risk management's impact on financial performance, and market risk management's impact on financial performance. Risk management theory, liquidity preference theory, adverse selection theory, and extreme value theory served as the study's guiding principles.
 Methodology: The correlational research approach was used in this study to evaluate these difficulties. The 12 listed commercial banks provided the study with their data. A questionnaire was utilized as the tool for gathering data in this study. To analyze the data, descriptive and inferential statistics were both used. Means and standard deviation were used for descriptive statistics.
 Findings: The output of the study shows that a positive association exists between operational risk management and financial performance. The findings revealed a positive relation between liquidity risk management and financial performance. On the same note, it came out from the output that risk management and financial performance are too positively related. Finally the results showed a positive association between market risk management and financial performance.
 Unique contribution to theory, practice and policy: The study offered the following suggestions. Develop and put into practice a comprehensive operational risk management system that discovers, evaluates, monitors, and controls operational risks. Commercial banks should do the same. The framework needs to match the bank's overall business plan, risk tolerance, and regulatory requirements.

Effect of Bank-Specific Factors on Non-performing Loans Among Commercial Banks in Tanzania

Objective –This paper examines the effect of bank-specific factors on non-performing loans in Tanzanian commercial banks (CBs).Design/methodology – Using annual data covering the period of 2011 -2020, a quantitative study methodology was employed. The authors used a one-step generalised method of moments (GMM) approach to estimate the effect of bank-specific factors on the percentage growth of NPLs in Tanzania.Results – According to the findings, increased return on assets, bank operating efficiency, income diversification, loan to-asset ratio in CBs reduces NPLs. In contrast, an increase in the deposit-to-asset ratio, capital adequacy, and age significantly increases the level of NPLs, which is consistent with the adverse selection theory. Conversely, decreased lag NPLs and raised bank operating efficiency will reduce the current year's NPL rate and vice versa.Research limitations/implications – Commercial banks should reduce the risk of defaulting borrowers by adjusting the contractual terms to the anticipated average quality of their applications. In addition, small banks should strive to maintain management efficiency to increase their profitability. Authorities should impose micro-prudential supervision on commercial banks' lending behaviour to reduce the number of NPLs.Novelty/Originality – The paper includes bank size (large and small banks) using both a one-step difference and a one-step system approach to measure the effect of bank-specific factors, which is usually not the case with most studies.

INFLUENCE OF LENDING DECISIONS ON SMALL AND MEDIUM ENTERPRISES DEVELOPMENT (CASE OF VIETINBANK, TIEN GIANG PROVINCE, VIETNAM)

Small and medium-sized enterprises (SMEs) in the world are an indispensable part of the national economy. Customer information is always an important input data for the banking industry. Currently, banks are facing the problem of information asymmetry because borrowers provide unreliable and transparent information (data on financial and non-financial statements). 
 Research approaches the theory of distribution of bank credit capital based on the theory of Asymmetric Information; The theory of adverse selection of credit markets; Moral hazard theory; Social capital theory; Theory of application in banking administration. 
 The results of the factors affecting the bank's lending decision from high to low: (1) Information about the relationship with the bank (MQHNH) (ES = 0.207, P = 0.000); (2) Information on the capacity of the owner of the enterprise (NLCSH) (ES = 0.158, P = 0.005); (3) Social Information (ESR) (ES = 0.111, P = 0.020); (4) Information on Collateral (TSTC) (ES = 0.100, P = 0.022); (5) Information on Corporate Finance (TCDN) (ES = 0.088, P = 0.005) and (6) Information on Credit History (LSTD) (ES = 0.070, P = 0.009).

FINANCIAL FACTORS AFFECTING PRODUCTION EFFICIENCY OF SMALL SCALE COFFEE FARMS IN BURUNDI

Purpose: The study sought to evaluate financial factors affecting the production efficiency of small-scale coffee farms in Burundi.
 Methodology: The research design used during the study was descriptive. The research targeted a population of 300 small-scale coffee farmers. The study had a sample population of 121 smallholder coffee farmers. The study conducted the research for a 6-year period between 2015-2020. The data was collected using a secondary data collection sheet. Secondary data was obtained from Coffee federations' annual reports, cooperatives reports, and coffee farmers’ records. Analysis of the data was done using the Eviews student 11 version. The analyzed data was presented in form of tabulations, mean and standard deviation.
 Findings: The study findings showed that the correlation analysis showed that the selling prices per kilogram of coffee beans had a negative and significant correlation to the production efficiency by R = 0.98. Production efficiency had a negative and significant correlation to capital availability by R = 0.260. Lastly, production efficiency had a positive and significant correlation to production costs at R = 0.500. The findings of the research obtained that selling prices per kilogram of coffee beans had a not significant negative effect on production efficiency, while capital availability and production costs had a positive effect on the production efficiency.
 A unique contribution to theory, practice, and policy: The study recommended that government should review the policies relating to the selling prices per kilogram of coffee beans to improve small-scale coffee farmers’ incomes. Government should also facilitate access to credit to small-scale coffee farmers. The study incorporated the Cobweb theory of price fluctuation, the theory of credit rationing also called adverse selection theory, and the high payoff inputs model.

Antecedents of Financial Instrument Choice by VC/PE Funds: Using the Theory of Adverse Selection

This article examines the choice of financial instruments of venture capital/private equity (VC/PE) funds in Indian infrastructure sector. Using a sample of 690 VC/PE investment transactions in Indian infrastructure sector over a period of fifteen years, the findings indicate that the choice of financial instrument by VC/PE funds in Indian infrastructure sector is largely influenced by the ability to mitigate information asymmetry and adverse selection faced by the fund. The evidence provides insights about the type of uncertainty faced by VC/PE funds in different types of Indian infrastructure financing transactions. Results show that the VC/PE funds are less able to screen growth stage firms and, therefore, utilize convertible securities to reduce the cost of adverse selection. Regression analysis provides empirical evidence about the determinants of VC/PE funds choice of financial instrument in Indian infrastructure sector. VC/PE funds face higher risk when an infrastructure firm expects greater variability of returns at early and growth stages and for new investments in any stage. TOPICS:Private equity, other real assets, emerging markets Key Findings • VC/PE funds use more common equity than other financial instruments for making investment in the Indian infrastructure sector. • When VC/PE investors are not able to mitigate information asymmetry and adverse selection cost, convertible securities are more likely to be used. • VC/PE funds face higher risk when any infrastructure firm expects greater variability in return at early stage, growth stage firms and for new investment in any stage.

Effect of Informal Financing Structure on Financial Performance of Women Owned Enterprises in Kenya: A Case Study of Gikomba Market

The main objective of this study was to investigate the effect of informal financing structure on financial performance of women owned enterprises in Kenya. The study covered rotating savings and credit associations (ROSCAs), trade credit financing, shylock financing and borrowing from friends and family as the specific objectives, guided by the Adverse Selection Theory, Financial Liberalization Theory, Credit Rationing Theory and the Altruistic Financing Theory. The study used a descriptive study and targeted1000 registered women owned enterprises; sample size of 90 female entrepreneurs was used to provide primary data. A regression analysis was performed to show the significance of the relationship between study variables from the findings. This study found out that ROSCAs and trade credits have a positive effect on financial performance and recommends entrepreneurs to utilize these informal methods if they opt for the informal financing. Shylock financing was found unfavorable in financing business enterprise due to huge interest rates, provision of collateral and the non-impact on financial performance. Borrowing from friends and family though with zero interest rates, results to smaller amounts that are inadequate to finance business enterprises. This study recommends that this option can only be exercised if ROSCAs and trade credit fail.

Credit Information Sharing Practices and Financial Performance of Commercial Banks in Kenya

The banking sector in Kenya suffered increased non-performing credits which prompted collapse of certain banks with an upsurge of loan defaulters. This was mainly attributed to the continued information asymmetry in the industry because of absence of a credit data sharing component. Commercial banks in Kenya have continued to encounter a number of challenges in obtaining information on customers’ payment history that helps guide on determining their ability to access and re-pay loan advancements. This has made more commercial banks to subscribe to credit reference bureaus since its establishment in 2008. As a result, commercial banks in Kenya have been experiencing high rates of Non-Performing Loans advanced to customers. The general objective of the study was to determine the effect of credit information sharing practices on financial performance of commercial bank in Kenya. The study specific objectives were to determine the effect of information accuracy, volume of lending and customer credit reports on financial performance of commercial bank in Kenya. The study was anchored by adverse selection theory, moral hazard theory and asymmetry theory. The researcher used a descriptive research design. The target population was five banks within Nairobi County including KCB, Equity Bank, Family Bank, Cooperative Bank and Barclays Bank. Primary data was collected using questionnaires and secondary data using financial statements of the commercial banks performance for the past 5 years. Data was analysed using descriptive statistics and inferential statistics. The study found that information accuracy, volume of lending and customer credit reports were positively and significantly related to the financial performance of the commercial banks. The study concludes that information accuracy increases the banks ' understanding of the applicants’ features and allows a more precise forecast of their probabilities of repayment, it decreases the information rents that banks could otherwise obtain from their clients and it can function as a borrower discipline tool. Lending volume enhances business banks ' enhanced operations, which in turn leads to banks’ enhanced economic results. Sharing of credit information has made commercial banks grant more loans on the basis of their reputation to deserving clients, thereby improving their profitability. When extensive consumer credit history information are easily accessible, it considerably decreases the cost of entering loan markets for fresh lenders, enhances competition and lowers credit rates. The research recommends that for enhanced results, all financial institutions in Kenya need to protect the precision of their platforms for data sharing. Regular site visits should offer credibility to the precision of the borrowers’ data. The data supplied by CRB should be used efficiently by commercial banks to lend to prospective borrowers. Only borrowers with a strong history of credit should be permitted access to the loans. The research also proposes that Kenya's commercial banks should base credit awards on the borrowers’ reputational assets, ensuring that the loan default rate is small, thus enhancing commercial bank performance.

Are lemons sold first? Dynamic signaling in the mortgage market

A central result in the theory of adverse selection in asset markets is that informed sellers can signal quality and obtain higher prices by delaying trade. This paper provides some of the first evidence of a signaling mechanism through trade delays using the residential mortgage market as a laboratory. We find a strong relationship between mortgage performance and time to sale for privately securitized mortgages. Additionally, deals made up of more seasoned mortgages are sold at lower yields. These effects are strongest in the “Alt-A” segment of the market, where mortgages are often sold with incomplete hard information, and in cases where the originator and the issuer of mortgage-backed securities are not affiliated.

Adverse selection in asset markets: Theory and evidence from the Indian market for cows

Dairy cows cycle through periods where their quality is more observable (the milking phase), and where their quality is less observable (the dry phase). This variation in quality observability creates the potential for an adverse selection problem. I develop a theoretical model of trade in dry and milking cows and find empirical evidence consistent with the adverse selection theory. In particular, dry animal prices fall less in response to negative shocks relative to milking animal prices, which is consistent with the model's prediction that negative shocks actually help the dry animal market by pushing more high quality owners to sell.

An Insurance Market Simulation With Both Adverse and Advantageous Selection

AbstractThe theory of adverse selection predicts that high‐risk individuals are more likely to buy insurance than low‐risk individuals if asymmetric information regarding individuals’ risk type is present in the market. The theory of advantageous selection predicts the opposite—a negative relationship between insurance coverage and risk type can be obtained when hidden knowledge in other dimensions (e.g., the degree of risk aversion) is present in addition to the risk type. Using the heterogeneity of insurance buyers in either risk type or risk aversion, we first introduce a classroom‐based insurance market simulation game to show that adverse selection and advantageous selection can coexist. We then explain the underlying concepts using two methods: a mathematical framework based on expected utility theory and an empirical framework based on the results of the game itself. The game is easy to implement, reinforces textbook concepts by providing students a hands‐on experience, and supplements current textbooks by bringing their content up to date with current research.

Underwriters' allocation with and without discretionary power: Evidence from the Hong Kong IPO market

This study uses a unique and extensive data set from the Hong Kong IPO market to examine the theory of adverse selection under two distinct regulatory regimes in relation to underwriters' discretionary power in IPO share allocation. Consistent with Rock's (1986) theory of adverse selection in the IPO market, we show that, prior to the introduction of the clawback provision; retail (uninformed) investors were allocated more of the overpriced offerings and less of the underpriced issues. However, after the provision is implemented, retail investors have been allocated significantly more of the underpriced offerings and less of the overpriced ones. Overall, we find that allocation-adjusted initial returns for the retail investors are lower (higher) than the risk-free rate pre- (post-) clawback provision. These findings imply that the mandatory clawback provision has enhanced the fairness in IPO share allocations among different investor groups and has reduced the winner's curse in the IPO market.

An examination of the relationship between vehicle insurance purchase and the frequency of accidents

Abstract The relationship between insurance, occurrences of road traffic accidents (RTAs) and general traffic safety has received growing attention over recent years among academics, industry practitioners and government policymakers. Using data on vehicle damage insurance in Taiwan, we examine whether drivers with higher insurance coverage are more likely to be involved in RTAs, and whether the relationship is moderated by the gender of the insured party as well as the age of both the vehicle and the insured party. Using a probit regression, we identify a positive relationship between coverage and claims and find that an insured party with a poor claims history has a higher probability of being involved in RTAs. Although our findings provide support for adverse selection theory, when considering the moderating effect of vehicle age, the positive relationship between coverage and claims becomes insignificant; indeed, vehicle age weakens the positive influence of coverage on claims. Our results suggest that drivers with a poor driving record purchasing higher insurance coverage for their new vehicle tend to be involved in more RTAs and submit more insurance claims.

Do sellers offer menus of contracts to separate buyer types? An experimental test of adverse selection theory

In the basic adverse selection model, a seller makes a contract offer to a privately informed buyer. A fundamental hypothesis of incentive theory is that the seller may want to offer a menu of contracts to separate the buyer types. In the good state of nature, total surplus is not different from the symmetric information benchmark, while in the bad state, private information may be welfare-reducing. We have conducted a laboratory experiment with 954 participants to test these hypotheses. While the results largely corroborate the theoretical predictions, we also find that private information may be welfare-enhancing in the good state.

New Developments in the Theory of Adverse Selection in Competitive Insurance

We provide an overview of the paths taken to understand existence and efficiency of equilibrium in competitive insurance markets with adverse selection since the seminal work by Rothschild and Stiglitz (1976). A stream of recent work reconsiders the strategic foundations of competitive equilibrium by carefully modelling the market game.

Time trends and determinants of the method of payment in M&As

We examine the time trends and determinants of the method of payment in M&As spanning four decades. The fraction of mixed payments tripled from about 10% before the turn of the century to 30% in the new century, while the fraction of stock (cash) payments peaked (bottomed out) in the late 1990s but has since plunged (surged). We can explain a portion, but not all, of these trends using explanatory variables linked to adverse selection theory, taxation, and contracting costs. We also show that mixed payments are not merely hybrids between cash and stock payments, but have unique determinants and features.

Underwriterss Allocation Power and Adverse Selection Costs in the IPO Process

This study uses a unique and extensive data set of over 28.2 million investors’ applications to examine the theory of adverse selection under two distinct regulatory regimes (discretionary against mandatory clawback provision) in relation to IPO share allocation. Consistent with Rock’s (1996) theory of adverse selection, we show that, prior to the implementation of the regulation; the probability of receiving an allocation in overpriced IPOs is significantly higher than that of receiving an allocation in underpriced hot issues. However, we find that the probability of an uninformed investor receiving an allocation in an underpriced issue increases significantly following the adoption of the mandatory clawback provision. We also report a significant increase in allocation-adjusted returns earned by uninformed investors in the period following introduction of the mandatory clawback provision. These findings imply that the mandatory clawback provision brings an element of fairness between different investor groups and reduces the winner’s curse in the IPO market.

Analysis IPO short run return at Tehran stock exchange and subsequent equity offering based on signaling hypothesis

In most countries IPOs pricing is under intrinsic price that means IPOs has abnormal return in short run .one of the hypotheses in financial economics for explaining of this problem known as IPOs puzzle is signaling theory. This study to discover the relation between underpricing and subsequent equity offering and Factors affecting the under pricing, of the new company's stock accepted in Tehran Stock Exchange has been. Research of time period is Ten-year (from 1378 to 1387). The study includes all companies listed in Tehran Stock Exchange. Analysis results from multiple linear regression and logit, tobit regression has been done. The results show that signaling hypothesis and market feedback hypothesis is not supported .At the test of adverse selection theory the only factor influencing the under pricing is the standard deviation of weekly returns.

Adverse vs. Advantageous Selection in Life Insurance Markets

Adverse selection theory predicts that people with a high death risk are more likely to purchase life insurance. The advantageous selection hypothesis predicts the opposite. Using a unique dataset merging administrative and survey records we find support for the advantageous selection hypothesis. We exploit variation in risk aversion among consumers and between pricing structures in individual and group life insurance markets to study and identify the relative strength of advantageous and adverse selection forces. We find that the overall negative relationship between risk and coverage is likely due to advantageous selection swamping adverse selection forces.

OUT-LICENSING IN MARKETS WITH ASYMMETRIC INFORMATION: THE CASE OF THE PHARMACEUTICAL INDUSTRY

Few large pharmaceutical companies have recently discovered out-licensing of terminated R&D results as a way to recoup some of the significant investments made in R&D and to improve R&D productivity. Our empirical investigation reveals that the licensing partners are preferably young, small and highly specialized companies. This reverses the traditional logic of out-licensing. While out-licensing is usually done because of downstream concerns, our analysis shows that the company which owns the necessary assets for further development (the large pharmaceutical company) sells the license to a firm (the small partner company) which has — at the time of deal closure — no track record to prove its ability to successfully develop the compound. As the lack of a track record does not allow the pharmaceutical company to distinguish between the partner firms based on their development capabilities, these out-licensing deals are characterized by an asymmetric distribution of information. The application of the theory of adverse selection allows deriving managerial recommendations along three dimensions of the out-licensing deal: product coverage, price setting and performance presumption. By making changes along these dimensions, R&D managers are able to reduce the information asymmetry and approximate an equilibrium in the out-licensing market.