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The impact of alternative bank monitoring policies on corporate investment and financing decisions

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  • William R. Emmons
  • James K. Seward

Abstract

Much of the benefit from bank loans is generated by the specialized monitoring and information gathering role provided by financial institutions, including their role in facilitating the reorganization of firms experiencing financial distress. Despite these numerous benefits, it is somewhat surprising that aggregate trends suggest that the corporate sector has decreased its reliance on bank loans. We model the relationship between alternative bank monitoring policies and corporate investment and financing decisions. Rather than taking the monitoring characteristics of the bank as fixed, we examine the effects of changes in bank monitoring policies. We provide insights into how the banking sector evolves through time.

Suggested Citation

  • William R. Emmons & James K. Seward, 2002. "The impact of alternative bank monitoring policies on corporate investment and financing decisions," Supervisory Policy Analysis Working Papers 2002-09, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlsp:2002-09
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    References listed on IDEAS

    as
    1. Hoshi, Takeo & Kashyap, Anil & Scharfstein, David, 1990. "The role of banks in reducing the costs of financial distress in Japan," Journal of Financial Economics, Elsevier, vol. 27(1), pages 67-88, September.
    2. George G. Kaufman, 1991. "The diminishing role of commercial banking in the U.S. economy," Working Paper Series, Issues in Financial Regulation 91-11, Federal Reserve Bank of Chicago.
    3. Colin Mayer, 1990. "Financial Systems, Corporate Finance, and Economic Development," NBER Chapters, in: Asymmetric Information, Corporate Finance, and Investment, pages 307-332, National Bureau of Economic Research, Inc.
    4. R. Glenn Hubbard, 1990. "Asymmetric Information, Corporate Finance, and Investment," NBER Books, National Bureau of Economic Research, Inc, number glen90-1, May.
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    Keywords

    Banks and banking; Corporations - Finance;

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