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The Optimal Concentration of Creditors


Our model assumes that creditors need to expend resources to collect on claims. Consequently, because diffuse creditors suffer from mutual free-riding ( Holmstrom (1982) ), they fare worse than concentrated creditors (e.g., a house bank). The model predicts that measures of debt concentration relate positively to creditors' (aggregate) debt collection expenditures and positively to management's chosen expenditures to resist paying. However, collection activity is purely redistributive, so social waste is larger when creditors are concentrated. If borrower quality is not known, the best firms choose the most concentrated creditors and pay higher expected yields. Copyright 2005 by The American Finance Association.

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Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 60 (2005)
Issue (Month): 5 (October)
Pages: 2193-2212

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Handle: RePEc:bla:jfinan:v:60:y:2005:i:5:p:2193-2212
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