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Liquidity, Pledgeability, and the Nature of Lending

Douglas Diamond (), Yunzhi Hu () and Raghuram Rajan
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Douglas Diamond: University of Chicago - Booth School of Business; NBER
Yunzhi Hu: University of North Carolina at Chapel Hill - Kenan-Flagler School of Business

No 2021-09, Working Papers from Becker Friedman Institute for Research In Economics

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)
Pages: 59 pages
Date: 2021
New Economics Papers: this item is included in nep-fdg
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