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Strategic bank monitoring and firms’ debt structure

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Author Info
Eirik Gaard Kristiansen () (Norwegian School of Economics and Business Administration and Norges Bank (Central Bank of Norway))
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.

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Publisher Info
Paper provided by Norges Bank in its series Working Paper with number 2005/10.

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Length: 35 pages
Date of creation: 28 Oct 2005
Date of revision:
Handle: RePEc:bno:worpap:2005_10

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Related research
Keywords: Corporate debt structure; bank lending; lock-in effects;

Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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References listed on IDEAS
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