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Monitoring, Liquidation, and Security Design

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Listed:
  • Rafael Repullo
  • Javier Suárez

Abstract

By identifying the possibility of imposing a credible threat of liquidation as the key role of informed (bank) finance in a moral hazard context, we characterize the circumstances under which a mixture of informed and uninformed (market) finance is optimal, and explain why bank debt is typically secured, senior, and tightly held. We also show that the effectiveness of mixed finance may be impaired by the possibility of collusion between the firms and their informed lenders, and that in the optimal renegotiation-proof contract informed debt capacity will be exhausted before appealing to supplementary uninformed finance. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Rafael Repullo & Javier Suárez, 1995. "Monitoring, Liquidation, and Security Design," Working Papers wp1995_9520, CEMFI.
    • Handle: RePEc:cmf:wpaper:wp1995_9520
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    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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