Diffusion of Financial Innovations : The Case of Junk Bonds and Note Issuance Facilities

This paper models the diffusion pattern of financial innovations. Our model distinguishes between two factors, internal and external influence, that determine banks' decision to adopt an innovation. Internal influence refers to competitive, strategic, and informational factors that are related to the number of banks that have adopted the innovation earlier and external influence captures the effect of exogenous factors on banks' assessment of the innovation's desirability. While the latter has been analyzed extensively in the literature, little attention has been paid to how the adoption of an innovation by one bank makes it more or less desirable for other banks to adopt the innovation (internal influence). We use mathematical diffusion models to examine the diffusion structure of two financial innovations; junk bonds and note issuance facilities (NIFs). We find evidence for positive internal influence at both first-time and repeat adoption levels by banks. Internal adoption dominated the diffusion pattern of NIFs but not for junk bonds. The results of this paper shows that innovations diffuse among banks in a more dynamic environment than is usually assumed in the literature