Bank monitoring and debt dilution

Eric Van Tassel

Finance Research Letters, 2024, vol. 62, issue PA

Abstract: We examine a model where an entrepreneur uses external debt to finance sequential production projects. When the entrepreneur takes on additional debt at a later date, this can dilute the original creditor’s claim against future revenue flows. To solve this problem, we show that the entrepreneur can rely on a lender who is able to make endogenous monitoring decisions based on updated information about the entrepreneur’s debt and investment opportunities.

Keywords: Collateral; Secured debt; Bank monitoring (search for similar items in EconPapers)
JEL-codes: D86 G21 G32 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:62:y:2024:i:pa:s1544612324001028

DOI: 10.1016/j.frl.2024.105072

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