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Implicit Benefits and Financing

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  • Allen, Franklin
  • Qian, Meijun
  • Xie, Jing

Abstract

Social relationship and business connections create implicit benefits between borrowers and lenders. We model how implicit benefits and repayment enforcement costs influence credit allocation, cost, and renegotiation. The optimal solution illustrates that financing with implicit benefits can in many circumstances achieve lower financing costs, higher managerial effort, and better economic outcomes for both the borrower and the lender. This result explains the continuing expansion of alternative financing despite advanced formal financial intermediation, the rise of corporate insider debt, and joint ownership of debt and equity. The growing size and complexity of projects and changes in community relationships explain the expansion of bank financing.

Suggested Citation

  • Allen, Franklin & Qian, Meijun & Xie, Jing, 2022. "Implicit Benefits and Financing," CEPR Discussion Papers 17264, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:17264
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    Cited by:

    1. Reddy, Ketan & Gopalan, Sasidaran, 2023. "Gender bias in access to trade credit: Firm-level evidence from emerging markets," Global Finance Journal, Elsevier, vol. 57(C).
    2. Sun, Chenhe & Ji, Yinuo & Chen, Zhenyun, 2023. "Insider selling and credit spread of corporate bonds1," Finance Research Letters, Elsevier, vol. 58(PB).
    3. Song, Fenghua & Thakor, Anjan & Quinn, Robert, 2023. "Purpose, profit and social pressure," Journal of Financial Intermediation, Elsevier, vol. 55(C).

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    More about this item

    Keywords

    Implicit benefits; Debt financing; Banks; Corporate insider debt; Joint equity-debt ownership; Social and business networks;
    All these keywords.

    JEL classification:

    • 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
    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact

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