Entrepreneurial R&D activities are vitally important for innovation, and, consequently for economic development. However, it is very hard to finance young R&D-oriented companies due to the pronounced information asymmetry problems and institutional issues. Venture capital investment has been recognized as one of the most effective ways in dealing with the agency problems associated with R&D financing and promoting innovation. Many nations started to imitate the ‘Silicon Valley Model’ since the mid-1980s with the expectation to stimulate entrepreneurial R&D activities. Nonetheless, the development of the venture capital markets is far from homogeneous around the world, and, even within the United States. This phenomenon raises extensive interests from researchers to find out the factors that affect the outcomes of transplanting venture capital investment to different countries.
The role of institutions played on financial activities has long been debated in the literature. Some researchers suggest that the differences in institutions, especially the divergence in financial and legal systems, are the major factors that impact on corporate performance and business behaviors across countries (La Porta et al., 1997, 1998; Allen & Gale, 1999; Rajan&Zingales; 2003). From cross country studies, it is known that VCs’ investment behaviors depend on the institutions of the countries where they operate. Researchers suggest that stronger institutions lead to more active VCs’ involvements in the management of their portfolio companies and more usage of innovative governance mechanisms, and, consequently lead to more developed venture capital markets (Kaplan et al., 2003; Cummings et al., 2003; Jeng and Wells, 2000).
Pain at any age is not good for anything except as a warning signal that something is wrong. Once that alarm goes off, pain should not be tolerated as just a part of "growing older." Your health care provider can evaluate your pain and determine the right treatment to relieve your pain. Your health care provider will ask questions or observe your condition to understand your pain.
Correlation in credit risk is a well-recognized phenomenon, and understanding the sources of correlated credit losses is crucial for many purposes, such as setting capital requirements for banks and pricing of structured credit products that are heavily exposed to correlations in credit risk (for example, the collateralized debt obligations (CDOs)). The issue becomes particularly important given the rapid growth of structured credit products in the financial markets in recent years. In spite of much research on this subject, researchers still do not understand many aspects of the correlation in credit risk, and this paper aims to move this literature forward.
The first question we explore in this paper is how much of the correlation in credit risk is driven by observable factors? This is an open empirical question. Most credit models are based on the doubly stochastic assumption that, conditional on observable risk factors, defaults are independent. This assumption is widely accepted and implemented in the banking practice when determining capital requirements. However, this assumption is challenged by Das, Duffie, Kapadia, and Saita (2007), and their findings are echoed by Duffie, Eckner, Horel, and Saita (2008). Further, several studies have documented that “contagion” has prominent impact on the credit risk of other firms (i.e., Jorion and Zhang (2007)), raising the possibility that “contagion” may play a more important role in the correlation in credit risk than people have realized. Based on this empirical phenomenon, some researchers have tried to model “contagion” in credit models (e.g., Giesecke (2004), Jarrow and Yu (2001), and Schönbucher and Schubert (2001)). However, it is not clear from the literature how much of the correlation is due to observable factors and how much is due to unobservable factors, such as “contagion,” and whether “contagion” is a general phenomenon in the economy.
