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Liquidity, Pledgeability, and the Nature of Lending

Author

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  • Douglas W. Diamond

    (University of Chicago - Booth School of Business; NBER)

  • Yunzhi Hu

    (University of North Carolina at Chapel Hill - Kenan-Flagler School of Business)

  • Raghuram G. Rajan

    (University of Chicago - Booth School of Business; NBER)

Abstract

We develop a theory of how corporate lending and financial intermediation change based on the fundamentals of the firm and its environment. We focus on the interaction between the prospective net worth or liquidity of an industry and the firm’s internal governance or pledgeability. Variations in prospective liquidity can induce changes in the nature, covenants, and quantity of loans that are made, the identity of the lender, and the extent to which the lender is leveraged. We offer predictions on how these might vary over the financial cycle.

Suggested Citation

  • Douglas W. Diamond & Yunzhi Hu & Raghuram G. Rajan, 2021. "Liquidity, Pledgeability, and the Nature of Lending," Working Papers 2021-09, Becker Friedman Institute for Research In Economics.
    • Handle: RePEc:bfi:wpaper:2021-09
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    Cited by:

    1. Hu, Yunzhi, 2022. "A dynamic theory of bank lending, firm entry, and investment fluctuations," Journal of Economic Theory, Elsevier, vol. 204(C).
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    3. François, Pascal & Naqvi, Hassan, 2023. "Secured and unsecured debt in creditor-friendly bankruptcy," Journal of Corporate Finance, Elsevier, vol. 80(C).

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    More about this item

    Keywords

    liquidity; pledgeability; financial cycle; monitoring; loans; performance-pricing debt; intermediary capital;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G3 - Financial Economics - - Corporate Finance and Governance
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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