D. D. Hester, Aspects of Monetary and Banking Theory and Moral Hazard: Discussion, The Journal of Finance, Vol. 37, No. 2, Papers and Proceedings of the Fortieth Annual Meeting of the American Finance Association, Washington, D.C., December 28-30, 1981 (May, 1982), pp. 395-397

This paper examines the pricing of intermediate-term line commitments, often called revolving credit agreements. Their characteristics, covenant, and compensating balance features are discussed. The fixed portion of the line is described as a dual phased option; it behaves as a put or a call depending on whether bank borrowing is undertaken. Two valuation models, based on the use of the borrowing, are derived for infinitely-lived line commitments. The pattern of borrowing by the firm is shown to principally depend on the relative size of the fixed and variable costs of the line.

The article presents the author's response to comments on his paper "Coalition Formation in the APB and FASB: Some Evidence on the Size Principle," by accounting expert James A. Anderson. These comments given by Anderson are partitioned into two major areas and the article provide a few general arguments in defense of the size principle and the particular investigation. In particular, topics including assumptions of the model and methodological issues on observation of coalitions, specifying payoffs and operationalizing tendency seem to capture the major points. The article also provides some remarks regarding the simplistic nature of the size principle versus more developed models of coalition formation based on policy dimensions. Anderson raises a number of points regarding the conditions required to test the predictions of the size principle and the information and threat effects. Some concerns are over the surrogates utilized in the tests. These comments focus on the inability to observe a winning coalition, the nature of a "tendency" toward minimum winning coalitions and the payoffs to participants in the standard-setting process.

Agricultural and Food Policy, Financial Economics