Theory of Bank Lending with Monitoring and Application to Rural Banking in India 2002-2003
We present a model in Costly State Verification framework that relates capital raised in a firm to profitability. We explain how optimality of investment is affected by how the aggregate funding affects the expected outcomes of the project. Although we find underinvestment, the problem does not get severe with increasing dead weight costs.
Volume (Year): 2 (2005)
Issue (Month): 2 ()
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"Capital Structure in Developing Countries,"
Rotman School of Management - Finance
00-001, Rotman School of Management, University of Toronto.
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