David Leece

Household Choice of Fixed Versus Floating Rate Debt: A Binomial Probit Model With Correction For Classification Error

The paper presents an econometric analysis of the choice by households in the United Kingdom, of ®xed rate mortgage debt covering the years 1991 to 1994 inclusive. Fixed rate mortgage instruments soon became a numerically signi®cant mortgage choice. For example the proportion of new mortgages that were ®xed rate was 46 percent in the ®rst quarter of 1993 (Coles, 1993) and 60 percent in the third quarter of 1993 (Housing Finance, 1994). The paper identi®es cross-section and interest rate effects on this mortgage choice. Data are obtained from the British Household Panel Survey (BHPS). There are important macro economic implications from the growth in the use of ®xed rate debt (Coles, 1993; Miles, 1994). Lack of ®xed interest rate and mortgage choice data has resulted in a dearth of econometric research in this area for the United Kingdom (Coles, 1993). Empirical work on the choice between ®xed rate mortgages (FRMs) and adjustable rate mortgages (ARMs) is evident in the United States (see Bruekner, 1986; Alm and Follain, 1987; Dhillon et al, 1987; Bruekner and Follain, 1988). The present research is differentiated by a focus on the choice of short run ®xed rate contracts (FRM) and a variable rate mortgage (VRM). North American contracts tend to be ®xed for 15 or 30 years. The paper also considers classi®cation error, a speci®cation problem neglected in previous work. The choice set for consumers in the mortgage market is heterogeneous and extensive, increasing the likelihood of classi®cation problems. The study begins (Section II) with a discussion of ®xed rate mortgage contracts from 1991 (Q.1) to 1995 (Q.1) and includes a review of the OXFORD BULLETIN OF ECONOMICS AND STATISTICS, 62, 1 (2000) 0305-9049

Choice of mortgage instrument, liquidity constraints and the demand for housing debt in the UK

The research uses microdata to estimate reduced form mortgage demand equations based on truncated regressions, dissagregated by choice of mortgage instrument. The choice is between a standard annuity mortgage and a balloon type mortgage (the endowment). The estimates are used to indicate the differential impact of credit market rationing and financial liberalization on households. The results indicate significant variations in mortgage demand by choice of mortgage instrument. Econometric testing demonstrates that the choice between an endowment and a repayment mortgage can be used as an exogenous indicator of liquidity and portfolio positions and different user costs of owner occupation.

Testing a theoretical model of mortgage demand on UK data

Mortgage demand is a poorly understood and under-researched aspect of the financial behaviour of households. This paper tests empirically the basic results of Brueckners model of mortgage demand on UK mortgage market data. The choice of mortgage instrument is used to identify impatient debt maximizers and patient borrowers who borrow at intermediate levels. Thus the research confirms the conditions under which households will use the largest possible mortgage and the circumstances under which savings are invested in the property. A unique contribution of the work is the estimation of mortgage demand equations corrected for endogenous housing demand, for a single housing finance system, where borrowers face different opportunity costs of equity in their owner occupied property, allowing a purer test of the theoretical model.

An econometric analysis of choice of mortgage design in the United Kingdom

The research seks to better understand the choice of mortgage design by households in the United Kingdom. Family Expenditures Survey data is used to test the various hypotheses on the determinants of the choice between an endowment and a repayment mortgage. A bivariate probit model with sample selection is estimated to detect any likely selectivity bias arising out of tenure choice. The theoretical modelling reflects the behaviour of liquidity constrained households comparing comparative periodic mortgage costs and households concerned with the oppurtunity cost of equity in a property. Actual choices appear to reflect the impact of nominal interest rates, income and cash flow considerations. There is little direct evidence that the choice of mortgage repayment vehicle is motivated by portfolio design. There is some tentative evidence of supply side pressure on endowment mortgage take up.

Regressive Interest Rate Expectations and Mortgage Instrument Choice in the United Kingdom Housing Market

The paper considers the choice of mortgage instrument when the rate of interest is fixed for a short duration, with reversion to a variable (bullet) rate mortgage contract. The research is the first direct test for regressive interest rate expectations using United Kingdom data while testing for wealth and portfolio effects. The econometric modeling uses a variety of nonparametric and parametric techniques to control for classification error in the dependent variable. There is evidence that households adopt regressive interest rate expectations. The lack of statistical significance of wealth and portfolio effects confirms the short run cash flow perspective of United Kingdom mortgage choices.

Mortgage design in the 1990s: theoretical and empirical issues

Examines recent innovations in the UK mortgage market and links these to the theoretical and empirical literature on the choice of mortgage instrument by households. Low inflation rates and employment insecurity have led to a demand for more flexible payment and amortization scheduling. Estimates a multivariate logit and a probit model to highlight the underlying determinants of amortization rates (mortgage maturity) from 1987 to 1991. Sees affordability criteria and the susceptibility of a household to financial problems as important determinants of extended mortgage maturities while the absence of these problems encourages shorter maturities, consistent with lifecycle behaviour. These choices provide the underpinnings to subsequent mortgage market innovations.

The Influence of Venture Capitalists' Source of Finance on their Post-Investment Behavior in Investee Companies

Venture capital firms face agency and incentive problems that can require the use of non-financial inputs into the investee company. This article considers differences in the post investment behaviour of venture capital firms. The literature has paid little attention to the influence of the source of venture capital funding on this behaviour. In particular there has been no research into the behaviour of semi captive venture capital companies. Changes in the structure of venture capital in the U.K. have taken the form of a rapid growth in semi captive enterprises. The non-parametric statistical analysis determines the significant differences in the post investment behaviour of this group compared to independent and captive firms. The results confirm the need to separately identify semi captive venture capital companies and to recognise the heterogeneity of post investment behaviour according to the source of funding.

Applying data visualization and knowledge discovery in databases to segment the market for risky financial assets

This paper uses the techniques of knowledge discovery in databases (KDD) and data visualization as a methodology to uncover significant clusters in the ownership of risky financial assets. Partitioning by medoids and data visualization identifies two significant clusters among risky asset holders. Cluster one is comparatively young, low wealth, high income consumers, with mortgage debt and regular savings patterns compared with a segment of older, low income, high wealth irregular savers with outright ownership of property. The analysis reveals that previous economic research into portfolio choices may have missed some important interactions and that specific, in addition to generic product needs, can vary with the lifecycle. Copyright

Agency and information problems in venture capital markets: an empirical study of the information needs of U.K. investors and the demand for accounting information

Venture capital firms face information deficits, asymmetric information and agency problems with respect to their proposed investee companies. This paper considers differences in the approaches and methods used by venture capital firms to overcome these market imperfections and value unquoted companies. The research looks for statistically significant differences in the valuation behaviour of different types of venture capital firms and assesses the relative importance and use of independent accounting information. The results suggest the overall importance of information deficits and agency problems and the extent to which they vary by organisational structure, funding and different stages of investment.

The post‐investment relationship between a venture capitalist and its investee companies

Purpose – The purpose of this paper is to identify the key characteristics of the post‐investment relationship between the venture capital firm and its investee companies.Design/methodology/approach – The research is a case study of a major UK venture capital firm using qualitative research to determine the key characteristics of the post‐investment relationship. The study is based on interviews with parties on both sides of the relationship.Findings – While the results reflect the findings of the entrepreneurship and venture capital literature they also point to the importance of network growth and development for organizational learning in the venture capital industry, professionalization of investee firms and as a context in which the selection of the entrepreneur and the post investment relationship are set.Research limitations/implications – The research has the limitation of most case studies that the results cannot readily be generalized, in this case to the wider population of venture capital firm...