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Institutional Liquidity Needs and the Structure of Monitored Finance

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  • Andrew Winton
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    Abstract

    A financial institution that finances and monitors firms learns private information about these firms. When the institution seeks funds to meet its own liquidity needs, it faces adverse selection ("liquidity") costs that increase with the risk of its claims on these firms. The institution can reduce its liquidity costs by holding debt rather than equity. Conversely, except in a limited setting resembling venture capital, firms that depend on monitored finance prefer to give the monitoring institution debt rather than equity. Institutions with less frequent or less severe liquidity needs have greater appetite for equity and for the debt of more risky borrowers. These predictions are consistent with general patterns of monitored finance. Copyright 2003, Oxford University Press.

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    File URL: http://hdl.handle.net/10.1093/rfs/hhg042
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    Bibliographic Info

    Article provided by Society for Financial Studies in its journal The Review of Financial Studies.

    Volume (Year): 16 (2003)
    Issue (Month): 4 ()
    Pages: 1273-1313

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    Handle: RePEc:oup:rfinst:v:16:y:2003:i:4:p:1273-1313

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    Cited by:
    1. Kobayashi, Mami & Osano, Hiroshi, 2012. "Nonrecourse financing and securitization," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 21(4), pages 659-693.
    2. Kobayashi, Mami & Osano, Hiroshi, 2011. "The new main bank system," Journal of the Japanese and International Economies, Elsevier, vol. 25(3), pages 336-354, September.
    3. Inderst, Roman, 2013. "Prudence as a competitive advantage: On the effects of competition on banks' risk-taking incentives," European Economic Review, Elsevier, vol. 60(C), pages 127-143.
    4. Winton, Andrew & Yerramilli, Vijay, 2008. "Entrepreneurial finance: Banks versus venture capital," Journal of Financial Economics, Elsevier, Elsevier, vol. 88(1), pages 51-79, April.
    5. Mayer, Colin & Schoors, Koen & Yafeh, Yishay, 2005. "Sources of funds and investment activities of venture capital funds: evidence from Germany, Israel, Japan and the United Kingdom," Journal of Corporate Finance, Elsevier, Elsevier, vol. 11(3), pages 586-608, June.

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