Direct versus Intermediated Finance: an Old Question and a New Answer
AbstractWe consider a closed economy where a risk neutral bank competes with a competitive bond market. Firms can finance a risky project either by a bank credit or by issuing a bond which is directly sold to risk averse investors who also can hold safe deposits at the bank. We show that a monopolistic bank tends to allocate more capital to lower quality projects but there are some interesting qualifications. If the asymmetric information concerns only the success probability, then we observe adverse selection while if it concerns only the expected return, bad types are driven out of the market.
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Bibliographic InfoPaper provided by Institute for Empirical Research in Economics - University of Zurich in its series IEW - Working Papers with number 087.
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Credit market; bond market; risk aversion; adverse selection;
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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2001-09-26 (All new papers)
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- Johnson, Shane A., 1997. "An Empirical Analysis of the Determinants of Corporate Debt Ownership Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(01), pages 47-69, March.
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