Seniority Structure and Financial Intermediation
AbstractThe 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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Bibliographic InfoPaper provided by University of Bonn, Germany in its series Discussion Paper Serie A with number 583.
Date of creation: Oct 1998
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Seniority Structure; Financial Intermediation; Asymmetric Information.;
Find related papers by JEL classification:
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2000-01-07 (All new papers)
- NEP-CFN-2000-01-07 (Corporate Finance)
- NEP-FIN-2000-01-07 (Finance)
- NEP-MIC-2000-01-07 (Microeconomics)
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