Direct versus Intermediated Finance: an Old Question and a New Answer
We consider a closed economy where a risk neutral bank competes with a competitive bond market. Firms can finance a risky project either by a bank credit or by issuing a bond which is directly sold to risk averse investors who also can hold safe deposits at the bank. We show that a monopolistic bank tends to allocate more capital to lower quality projects but there are some interesting qualifications. If the asymmetric information concerns only the success probability, then we observe adverse selection while if it concerns only the expected return, bad types are driven out of the market.
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- Takeo Hoshi & Anil Kashyap & David Scharfstein, 1993. "The Choice Between Public and Private Debt: An Analysis of Post-Deregulation Corporate Financing in Japan," NBER Working Papers 4421, National Bureau of Economic Research, Inc.
- Bisin, Alberto & Gottardi, Piero, 1999.
"Competitive Equilibria with Asymmetric Information,"
Journal of Economic Theory,
Elsevier, vol. 87(1), pages 1-48, July.
- Alberto Bisin & Piero Gottardi, 1998. "Competitive Equilibria with Asymmetric Information," Levine's Working Paper Archive 2062, David K. Levine.
- Johnson, Shane A., 1997. "An Empirical Analysis of the Determinants of Corporate Debt Ownership Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(01), pages 47-69, March.
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