Monitoring and Reputation: The Choice between Bank Loans and Directly Placed Debt
Douglas Diamond
Journal of Political Economy, 1991, vol. 99, issue 4, 689-721
Abstract:
This paper determines when a debt contract will be monitored by lenders. This is the choice between borrowing directly (issuing a bond, without monitoring) and borrowing through a bank that monitors to alleviate moral hazard. This provides a theory of bank loan demand and of the role of monitoring in circumstances in which reputation effects are important. A key result is that borrowers with credit ratings toward the middle of the spectrum rely on bank loans, and in periods of high interest rates or low future profitability, higher-rated borrowers choose to borrow from banks. Copyright 1991 by University of Chicago Press.
Date: 1991
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Persistent link: https://EconPapers.repec.org/RePEc:ucp:jpolec:v:99:y:1991:i:4:p:689-721
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