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Strategic bank monitoring and firms’ debt structure

Kristiansen, Eirik Gaard
Working paper
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URI
http://hdl.handle.net/11250/162678
Date
2005-10
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  • Discussion papers (SAM) [578]
Abstract
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.
Publisher
Norwegian School of Economics and Business Administration. Department of Economics
Series
Discussion paper
2005:21

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