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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by University of Bonn, Germany in its series Discussion Paper Serie A with number 583.
Date of creation: Oct 1998
Date of revision:
Contact details of provider:
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
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)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Franklin Allen, Douglas Gale, 1988.
"Optimal Security Design,"
Review of Financial Studies,
Society for Financial Studies, vol. 1(3), pages 229-263.
- Franklin Allen & Douglas Gale, . "Optimal Security Design," Rodney L. White Center for Financial Research Working Papers 26-87, Wharton School Rodney L. White Center for Financial Research.
- Stuart C. Gilson, 1991. "Managing Default: Some Evidence On How Firms Choose Between Workouts And Chapter 11," Journal of Applied Corporate Finance, Morgan Stanley, vol. 4(2), pages 62-70.
- Berglof, Erik & von Thadden, Ernst-Ludwig, 1994. "Short-Term versus Long-Term Interests: Capital Structure with Multiple Investors," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 1055-84, November.
- Gilson, Stuart C. & John, Kose & Lang, Larry H. P., 1990. "Troubled debt restructurings*1: An empirical study of private reorganization of firms in default," Journal of Financial Economics, Elsevier, vol. 27(2), pages 315-353, October.
- Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
- Eberhart, Allan C & Moore, William T & Roenfeldt, Rodney L, 1990. " Security Pricing and Deviations from the Absolute Priority Rule in Bankruptcy Proceedings," Journal of Finance, American Finance Association, vol. 45(5), pages 1457-69, December.
- 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.
- Oliver Hart & John Moore, 1994.
"Debt and Seniority: An Analysis of the Role of Hard Claims in Constraining Management,"
NBER Working Papers
4886, National Bureau of Economic Research, Inc.
- Hart, Oliver & Moore, John, 1995. "Debt and Seniority: An Analysis of the Role of Hard Claims in Constraining Management," American Economic Review, American Economic Association, vol. 85(3), pages 567-85, June.
- Stiglitz, Joseph E, 1985. "Credit Markets and the Control of Capital," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(2), pages 133-52, May.
- Boot, Arnoud W A & Thakor, Anjan V, 1993.
" Security Design,"
Journal of Finance,
American Finance Association, vol. 48(4), pages 1349-78, September.
- Takeo Hoshi & Anil Kashyap & David Scharfstein, 1989. "Bank monitoring and investment: evidence from the changing structure of Japanese corporate banking relations," Finance and Economics Discussion Series 86, Board of Governors of the Federal Reserve System (U.S.).
- Barclay, Michael J & Smith, Clifford W, Jr, 1995. " The Priority Structure of Corporate Liabilities," Journal of Finance, American Finance Association, vol. 50(3), pages 899-917, July.
- Gertner, Robert & Scharfstein, David, 1991.
" A Theory of Workouts and the Effects of Reorganization Law,"
Journal of Finance,
American Finance Association, vol. 46(4), pages 1189-1222, September.
- Robert Gertner & David Scharfstein, 1991. "A Theory of Workouts and the Effects of Reorganization Law," NBER Technical Working Papers 0103, National Bureau of Economic Research, Inc.
- Welch, Ivo, 1997. "Why Is Bank Debt Senior? A Theory of Asymmetry and Claim Priority Based on Influence Costs," Review of Financial Studies, Society for Financial Studies, vol. 10(4), pages 1203-36.
- Diamond, Douglas W., 1993. "Seniority and maturity of debt contracts," Journal of Financial Economics, Elsevier, vol. 33(3), pages 341-368, June.
- Berkovitch, Elazar & Kim, E Han, 1990. " Financial Contracting and Leverage Induced Over- and Under-Investment Incentives," Journal of Finance, American Finance Association, vol. 45(3), pages 765-94, July.
- Harris, Milton & Raviv, Artur, 1990. " Capital Structure and the Informational Role of Debt," Journal of Finance, American Finance Association, vol. 45(2), pages 321-49, June.
- Weiss, Lawrence A., 1990. "Bankruptcy resolution: Direct costs and violation of priority of claims," Journal of Financial Economics, Elsevier, vol. 27(2), pages 285-314, October.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (BGSE Office).
If references are entirely missing, you can add them using this form.