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Strategic bank monitoring and firms’ debt structure

Author

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  • Eirik Gaard Kristiansen

    (Norwegian School of Economics and Business Administration
    Norges Bank (Central Bank of Norway))

Abstract

Firms choose debt structure and competing banks choose monitoring intensity. Monitoring improves credit allocation, but creates informational lock-in effects in bank-borrower relationships. In a competitive credit market, banks dissipate anticipated profit from serving locked-in borrowers subsequently revealed to the bank as good to attract new borrowers with unknown credit quality. Consequently, banks’ lending strategies result in cross-subsidies from good to bad borrowers. We investigate how firms’ choice of debt structure interacts with the cross-subsidies inherent in banks’ lending strategies. The analysis sheds light on how dynamic bank competition determines monitoring intensity, seniority, and maturity structure in bank dependent industries.

Suggested Citation

  • Eirik Gaard Kristiansen, 2005. "Strategic bank monitoring and firms’ debt structure," Working Paper 2005/10, Norges Bank.
    • Handle: RePEc:bno:worpap:2005_10
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    File URL: https://www.norges-bank.no/globalassets/upload/import/publikasjoner/arbeidsnotater/pdf/arb-2005-10.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Corporate debt structure; bank lending; lock-in effects;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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