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Long-Term Debt and Hidden Borrowing

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  • Heski Bar-Isaac
  • Vicente Cuñat

Abstract

Borrowers can raise funds from a competitive banking sector that shares information and from opaque hidden lenders. Hidden lenders allow borrowers to conceal poor results, and thereby affect contracts in the banking sector. In equilibrium, borrowers obtain funds from both sectors simultaneously. The lack of transparency generates cross-subsidies between different borrowers who are observationally equivalent to banks and face the same interest rate. As the cost of hidden borrowing falls, an increasing number of borrowers face identical terms; for sufficiently low costs, all borrowers who take loans (which may include inefficient borrowers) use the same bank debt contract.

Suggested Citation

  • Heski Bar-Isaac & Vicente Cuñat, 2014. "Long-Term Debt and Hidden Borrowing," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 3(1-2), pages 87-122.
  • Handle: RePEc:oup:rcorpf:v:3:y:2014:i:1-2:p:87-122.
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    File URL: http://hdl.handle.net/10.1093/rcfs/cfu007
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    Cited by:

    1. Heski Bar-Isaac & Vicente Cuñat, 2014. "Long-Term Debt and Hidden Borrowing," Review of Corporate Finance Studies, Oxford University Press, vol. 3(1-2), pages 87-122.
    2. Alberto Bennardo & Marco Pagano & Salvatore Piccolo, 2015. "Multiple Bank Lending, Creditor Rights, and Information Sharing," Review of Finance, European Finance Association, vol. 19(2), pages 519-570.

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    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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