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Agency Cost of Debt and Credit Market Imperfections: A Bargaining Approach

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  • Erkki Koskela
  • Rune Stenbacka

Abstract

This paper studies the effect of credit market imperfections, measured by the relative bargaining power of banks, on the agency costs of debt finance. The threshold of obtaining loan finance is shown to be independent of the relative bargaining power of the financier. However, lower relative bargaining power of banks leads to lower lending rates and investment return distributions with lower, but less risky returns. Thus, our analysis does not support the view, presented in a large existing literature, that there would be a trade‐off between reduced credit market imperfections and higher agency costs of debt finance.

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  • Erkki Koskela & Rune Stenbacka, 2004. "Agency Cost of Debt and Credit Market Imperfections: A Bargaining Approach," Bulletin of Economic Research, Wiley Blackwell, vol. 56(4), pages 365-377, October.
    • Handle: RePEc:bla:buecrs:v:56:y:2004:i:4:p:365-377
    DOI: 10.1111/j.1467-8586.2004.00210.x
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    References listed on IDEAS

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