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Corporate Financial Policy and the Theory of Financial Intermediation


  • Seward, James K


This paper examines the optimal structure of financial contracts in an economy subject to two forms of moral hazard. Multiple information problems are shown to generate a role for multiple classes of financial claimants. The author then shows that economic efficiency is enhanced if the financial structure of the economy consists of both direct and intermediated financial contract markets. Consequently, his results demonstrate a motivation for the complementarity between capital markets and depository financial institutions. Copyright 1990 by American Finance Association.

Suggested Citation

  • Seward, James K, 1990. " Corporate Financial Policy and the Theory of Financial Intermediation," Journal of Finance, American Finance Association, vol. 45(2), pages 351-377, June.
  • Handle: RePEc:bla:jfinan:v:45:y:1990:i:2:p:351-77

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    References listed on IDEAS

    1. Andrew W. Lo, A. Craig MacKinlay, 1988. "Stock Market Prices do not Follow Random Walks: Evidence from a Simple Specification Test," Review of Financial Studies, Society for Financial Studies, vol. 1(1), pages 41-66.
    2. Karl E. Case & Robert J. Shiller, 1988. "The behavior of home buyers in boom and post-boom markets," New England Economic Review, Federal Reserve Bank of Boston, issue Nov, pages 29-46.
    3. Hart, Oliver D & Kreps, David M, 1986. "Price Destabilizing Speculation," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 927-952, October.
    4. Fama, Eugene F & French, Kenneth R, 1988. "Permanent and Temporary Components of Stock Prices," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 246-273, April.
    5. Stein, Jeremy C, 1987. "Informational Externalities and Welfare-Reducing Speculation," Journal of Political Economy, University of Chicago Press, vol. 95(6), pages 1123-1145, December.
    6. Jeffrey A. Frankel and Kenneth A. Froot., 1986. "Explaining the Demand for Dollars: International Rates of Return and the Expectations of Chartists and Fundamentalists," Economics Working Papers 8603, University of California at Berkeley.
    7. Robert Shiller, 1988. "Portfolio Insurance and Other Investor Fashions as Factors in the 1987 Stock Market Crash," NBER Chapters,in: NBER Macroeconomics Annual 1988, Volume 3, pages 287-297 National Bureau of Economic Research, Inc.
    8. Smith, Vernon L & Suchanek, Gerry L & Williams, Arlington W, 1988. "Bubbles, Crashes, and Endogenous Expectations in Experimental Spot Asset Markets," Econometrica, Econometric Society, vol. 56(5), pages 1119-1151, September.
    9. Leland, Hayne & Rubinstein, Mark, 1988. "Comments on the Market Crash: Six Months After," Journal of Economic Perspectives, American Economic Association, vol. 2(3), pages 45-50, Summer.
    10. Tirole, Jean, 1982. "On the Possibility of Speculation under Rational Expectations," Econometrica, Econometric Society, vol. 50(5), pages 1163-1181, September.
    11. Kenneth D. West, 1987. "Order Backlogs and Production Smoothing," NBER Working Papers 2385, National Bureau of Economic Research, Inc.
    12. John Y. Campbell & Albert S. Kyle, 1993. "Smart Money, Noise Trading and Stock Price Behaviour," Review of Economic Studies, Oxford University Press, vol. 60(1), pages 1-34.
    13. Fischer Black, 1988. "An Equilibrium Model of the Crash," NBER Chapters,in: NBER Macroeconomics Annual 1988, Volume 3, pages 269-276 National Bureau of Economic Research, Inc.
    14. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    15. Oliver D. Hart, 1977. "On The Profitability of Speculation," The Quarterly Journal of Economics, Oxford University Press, vol. 91(4), pages 579-597.
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    Cited by:

    1. Demirguc-Kunt, Asli, 1992. "Developing country capital structures and emerging stock markets," Policy Research Working Paper Series 933, The World Bank.
    2. Henke, Sabine & Burghof, Hans-Peter & Rudolph, Bernd, 1998. "Credit securitization and credit derivatives: Financial instruments and the credit risk management of middle market commercial loan portfolios," CFS Working Paper Series 1998/07, Center for Financial Studies (CFS).
    3. Andersen, Thomas Barnebeck & Malchow-Moller, Nikolaj, 2006. "Strategic interaction in undeveloped credit markets," Journal of Development Economics, Elsevier, vol. 80(2), pages 275-298, August.
    4. Biaggio Bossone & Sandeep Mahajan & Farah Zahir, 2003. "Financial Infrastructure, Group Interests, and Capital Accumulation; Theory, Evidence, and Policy," IMF Working Papers 03/24, International Monetary Fund.
    5. Hooks, Linda M., 2003. "The impact of firm size on bank debt use," Review of Financial Economics, Elsevier, vol. 12(2), pages 173-189.
    6. Ross Levine, 1990. "Financial structure and economic development," International Finance Discussion Papers 381, Board of Governors of the Federal Reserve System (U.S.).
    7. Boyd, John H. & Smith, Bruce D., 1999. "The Use of Debt and Equity in Optimal Financial Contracts," Journal of Financial Intermediation, Elsevier, vol. 8(4), pages 270-316, October.
    8. Jean-Daniel Guigou & Laurent Vilanova, 1999. "Les vertus du financement bancaire: fondements et limites," Revue Finance Contrôle Stratégie,, vol. 2(2), pages 97-133, June.
    9. Robert O. Edmister & Gay B. Hatfield, 1995. "The Significance of Porfolio Lenders to Real Estate Brokers," Journal of Real Estate Research, American Real Estate Society, vol. 10(1), pages 57-68.
    10. repec:rss:jnljef:v3i5p1 is not listed on IDEAS
    11. Gangopadhyay, Shubhashis & Mukhopadhyay, Bappaditya, 2002. "Multiple bank lending and seniority in claims," Journal of Economics and Business, Elsevier, vol. 54(1), pages 7-30.
    12. João A.C. Santos, 1998. "Banking and commerce: how does the United States compare to other countries?," Economic Review, Federal Reserve Bank of Cleveland, issue Q IV, pages 14-26.
    13. Stanton, Sonya Williams, 1998. "The Underinvestment Problem and Patterns in Bank Lending," Journal of Financial Intermediation, Elsevier, vol. 7(3), pages 293-326, July.
    14. Gwatidzo, Tendai & Ojah, Kalu, 2014. "Firms’ debt choice in Africa: Are institutional infrastructure and non-traditional determinants important?," International Review of Financial Analysis, Elsevier, vol. 31(C), pages 152-166.

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