Management Papers

Document Type

Journal Article

Date of this Version

11-2014

Publication Source

Management Science

Volume

60

Issue

11

Start Page

2776

Last Page

2793

DOI

10.1287/mnsc.2014.1944

Abstract

It is widely acknowledged that the 2007 mortgage crisis was preceded by a broad deterioration in underwriting diligence. This paper shows that this deterioration varied by the industry affiliation of mortgage lenders. Loans issued by homebuilders and stand-alone lenders were significantly less likely to default than loans issued by depository banks and affiliates of major financial institutions. I argue that homebuilders and stand-alone lenders had the least financial capacity to hold mortgages, and their resulting need to sell loans quickly on the secondary market forced them to issue safer loans. Tests of other explanations, including differences in information and incentives to avoid foreclosure externalities, receive little support. This study highlights a novel means by which firm boundaries influence firm adaptation to changing market conditions by defining the boundaries of the internal capital markets and hence the relative constraints of constituent units.

Copyright/Permission Statement

Originally published in Management Science © 2014 INFORMS

This is a pre-publication version. The final version is available at http://dx.doi.org/10.1287/mnsc.2014.1944

Comments

At the time of this publication Dr. Gartenberg was affiliated with NYU, but she is now a faculty member at the University of Pennsylvania.

Keywords

corporate finance, financial institutions, banks, organization studies, strategy, industrial organization, firm objectives, organization and behavior, real estate

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Date Posted: 25 October 2018

This document has been peer reviewed.