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Seniority Structure and Financial Intermediation

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  • Schuhmacher, Joachim
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    Abstract

    The financial structure of firms is diverse. Firms issue many different types of financial claims. This article focuses on the seniority structure of debt contracts. It is outlined under what conditions firms can improve the outcome of their financial decisions by choosing seniority structure. The main reason for issuing debt contracts with different priority is that in case of financial distress firms only have to renegotiate with a smaller number of creditors. This outcome makes observation of the firm`s condition by creditors more likely. If observation occurs seniority decreases observation costs. But observation can also harm the owner so that seniority could be inferior to a debt structure which treats all creditors identically. Later on we introduce a financial intermediary into the model. It is outlined how a financial intermediary can be welfare improving on the junior level.

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    File URL: http://www.wiwi.uni-bonn.de/bgsepapers/bonsfa/bonsfa583.pdf
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    Bibliographic Info

    Paper provided by University of Bonn, Germany in its series Discussion Paper Serie A with number 583.

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    Length: pages
    Date of creation: Oct 1998
    Date of revision:
    Handle: RePEc:bon:bonsfa:583

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    Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
    Fax: +49 228 73 6884
    Web page: http://www.bgse.uni-bonn.de/index.php?id=517

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    Keywords: Seniority Structure; Financial Intermediation; Asymmetric Information.;

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    1. Madan, Dilip & Soubra, Badih, 1991. "Design and Marketing of Financial Products," Review of Financial Studies, Society for Financial Studies, vol. 4(2), pages 361-84.
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