Bankruptcy Litigation and Relationship Banking

François Marini
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François Marini: LEDa - Laboratoire d'Economie de Dauphine - IRD - Institut de Recherche pour le Développement - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique

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Abstract: This paper analyzes how bankruptcy litigation affects the value of relationship banking. In our model, bankruptcy courts may make type 1 errors, i.e., they may declare that an insolvent firm is solvent; and they may make type 2 errors, i.e., they may declare that a solvent firm is insolvent. Our model provides four results. First, the cost of bank debt decreases when the probability that bankruptcy courts make type 2 errors increases. Second, the value of relationship banking increases when the probability that bankruptcy courts make type 1 errors increases. Third, the cost of credit intermediation decreases when the probability that bankruptcy courts make type 2 errors increases. Fourth, the diversification mechanism does not fully solve the delegated monitoring problem.

Keywords: Bank monitoring; bankruptcy litigation; cost of bank debt; cost of credit inter-mediation; cost of financial distress; relationship banking (search for similar items in EconPapers)
Date: 2013-01
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Published in Journal of business finance & accounting, 2013, 40 (1/2), ⟨10.1111/jbfa.12011⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01617364

DOI: 10.1111/jbfa.12011

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