Financial Intermediaries as Markets for Firm Assets

Luis Araujo () and Raoul Minetti

Economic Journal, 2007, vol. 117, issue 523, pages 1380-1402

Abstract: This article proposes a theory of financial intermediation based on intermediaries' role in the reallocation of assets of distressed firms. The article suggests that intermediaries aggregate information on firms in credit relationships and use this information to facilitate asset reallocation across firms. However, this role of intermediaries hinges on debt contracts that grant lenders the right to foreclose assets of distressed borrowers and, hence, exclude the most productive asset users from the resale market. We characterise conditions under which intermediaries arise and under which their role in the credit market enhances their role as markets for firm assets. Copyright 2007 The Author(s). Journal compilation Royal Economic Society 2007.

Date: 2007

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