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The Optimal Concentration of Creditors

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  • Ivo Welch
  • Arturo Bris

Abstract

Our model assumes that creditors need to expend resources to collect on claims. Consequently, because diffuse creditors suffer from mutual free-riding (Holmstrom (1982)), they fare worse than concentrated creditors (e.g. a house bank). The model predicts that measures of debt concentration relate positively to creditors' (aggregate) debt collection expenditures and positively to management's chosen expenditures to resist paying. However, collection activity is purely redistributive, so social waste is larger when creditors are concentrated. If borrower quality is not known, the best firms choose the most concentrated creditors and pay higher expected yields.

Suggested Citation

  • Ivo Welch & Arturo Bris, 2001. "The Optimal Concentration of Creditors," Yale School of Management Working Papers ysm248, Yale School of Management, revised 01 Apr 2004.
    • Handle: RePEc:ysm:somwrk:ysm248
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    File URL: http://icfpub.som.yale.edu/publications/2627
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    Keywords

    Banking; Capital Structure;

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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