Strategic bank monitoring and firms’ debt structure
Working paper
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http://hdl.handle.net/11250/162678Utgivelsesdato
2005-10Metadata
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Sammendrag
Firms choose debt structure and competing banks choose monitoring intensity.
Monitoring improves credit allocation, but creates informational lock-in
effects in bank-borrower relationships. In a competitive credit market, banks
dissipate anticipated profit from serving locked-in borrowers subsequently revealed
to the bank as good to attract new borrowers with unknown credit
quality. Consequently, banks’ lending strategies result in cross-subsidies from
good to bad borrowers. We investigate how firms’ choice of debt structure
interacts with the cross-subsidies inherent in banks’ lending strategies. The
analysis sheds light on how dynamic bank competition determines monitoring
intensity, seniority, and maturity structure in bank dependent industries.
Utgiver
Norwegian School of Economics and Business Administration. Department of EconomicsSerie
Discussion paper2005:21