Liquidity, pledgeability, and the nature of lending

Douglas W. Diamond, Yunzhi Hu and Raghuram Rajan

Journal of Financial Economics, 2022, vol. 143, issue 3, 1275-1294

Abstract: We develop a theory of how corporate lending and financial intermediation change based on the fundamentals of the firm and its environment. We focus on the interaction between the prospective net worth or liquidity of an industry and the firm’s internal governance or pledgeability. Variations in prospective liquidity can induce changes in the nature, covenants, and quantity of loans that are made, the identity of the lender, and the extent to which the lender is leveraged. We offer predictions on how these might vary over the financial cycle.

Keywords: Liquidity; Pledgeability; Financial cycle; Monitoring; Loans; Performance-pricing debt; Intermediary capital (search for similar items in EconPapers)
JEL-codes: G21 G24 G32 G33 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (4)

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Related works:
Working Paper: Liquidity, Pledgeability, and the Nature of Lending (2021)
Working Paper: Liquidity, Pledgeability, and the Nature of Lending (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:143:y:2022:i:3:p:1275-1294

DOI: 10.1016/j.jfineco.2021.05.005

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