Strategic bank monitoring and firms’ debt structure

Eirik Kristiansen

No 2005/10, Working Paper from Norges Bank

Abstract: Firms choose debt structure and competing banks choose monitoring intensity. Monitoring improves credit allocation, but creates informational lock-in effects in bank-borrower relationships. In a competitive credit market, banks dissipate anticipated profit from serving locked-in borrowers subsequently revealed to the bank as good to attract new borrowers with unknown credit quality. Consequently, banks’ lending strategies result in cross-subsidies from good to bad borrowers. We investigate how firms’ choice of debt structure interacts with the cross-subsidies inherent in banks’ lending strategies. The analysis sheds light on how dynamic bank competition determines monitoring intensity, seniority, and maturity structure in bank dependent industries.

Keywords: Corporate debt structure; bank lending; lock-in effects (search for similar items in EconPapers)
JEL-codes: D82 G21 G32 L14 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2005-10-28
New Economics Papers: this item is included in nep-cfn, nep-fin and nep-fmk
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