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Bank monitoring and debt dilution

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  • Van Tassel, Eric

Abstract

We examine a model where an entrepreneur uses external debt to finance sequential production projects. When the entrepreneur takes on additional debt at a later date, this can dilute the original creditor’s claim against future revenue flows. To solve this problem, we show that the entrepreneur can rely on a lender who is able to make endogenous monitoring decisions based on updated information about the entrepreneur’s debt and investment opportunities.

Suggested Citation

  • Van Tassel, Eric, 2024. "Bank monitoring and debt dilution," Finance Research Letters, Elsevier, vol. 62(PA).
    • Handle: RePEc:eee:finlet:v:62:y:2024:i:pa:s1544612324001028
    DOI: 10.1016/j.frl.2024.105072
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    References listed on IDEAS

    as
    1. Peter M. Demarzo, 2019. "Presidential Address: Collateral and Commitment," Journal of Finance, American Finance Association, vol. 74(4), pages 1587-1619, August.
    2. Donaldson, Jason Roderick & Gromb, Denis & Piacentino, Giorgia, 2020. "The paradox of pledgeability," Journal of Financial Economics, Elsevier, vol. 137(3), pages 591-605.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Collateral; Secured debt; Bank monitoring;
    All these keywords.

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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