Long-Term Debt and Hidden Borrowing

Heski Bar-Isaac and Vicente Cuñat

The Review of Corporate Finance Studies, 2014, vol. 3, issue 1-2, 87-122

Abstract: Borrowers can raise funds from a competitive banking sector that shares information and from opaque hidden lenders. Hidden lenders allow borrowers to conceal poor results, and thereby affect contracts in the banking sector. In equilibrium, borrowers obtain funds from both sectors simultaneously. The lack of transparency generates cross-subsidies between different borrowers who are observationally equivalent to banks and face the same interest rate. As the cost of hidden borrowing falls, an increasing number of borrowers face identical terms; for sufficiently low costs, all borrowers who take loans (which may include inefficient borrowers) use the same bank debt contract.

JEL-codes: D82 D86 G21 (search for similar items in EconPapers)
Date: 2014
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Related works:
Working Paper: Long-term Debt and Hidden Borrowing (2012)
Working Paper: Long-term debt and hidden borrowing (2005)
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