A Main Bank Approach to Optimal Financial Contracting
This paper analyses the costs and benefits of using a Main Bank (MB) as a financial provider, which is so common in countries such as Japan. Several banks lend resources to a particular firm but only one monitors and remains responsible to other participants. These inside banks act as fund providers for the project but exchange roles by the time other projects are considered. We show how, depending on firms quality and the banks skills to monitor, an MB-contract outperforms other arrangements. These conditions, are shown not to be idyosincratic of the Japan marketplace.
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