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Liquidity, Pledgeability, and the Nature of Lending

Douglas Diamond, Yunzhi Hu and Raghuram Rajan

No 28377, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: G2 G21 G23 G3 G32 G33 (search for similar items in EconPapers)
Date: 2021-01
New Economics Papers: this item is included in nep-cfn, nep-cwa and nep-ore
Note: CF
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Published as Douglas W. Diamond & Yunzhi Hu & Raghuram G. Rajan, 2021. "Liquidity, pledgeability, and the nature of lending," Journal of Financial Economics, .

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