Monitoring, Liquidation, and Security Design
- 1 January 1998
- journal article
- Published by Oxford University Press (OUP) in The Review of Financial Studies
- Vol. 11 (1) , 163-187
- https://doi.org/10.1093/rfs/11.1.163
Abstract
By identifying the possibility of imposing a creditable threat of liquidation as the key role of informed (bank) finance in a moral hazard context, we characterize the circumstances under which a mixture of informed and uninformed (market) finance is optimal, and explain why bank debt is typically secured, senior, and tightly held. We also show that the effectiveness of mixed finance may be impaired by the possibility of collusion between the firms and their informed lenders, and that in the optimal renegotiation-proof contract informed debt capacity will be exhausted before appealing to supplementary uninformed finance.Keywords
All Related Versions
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