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Monitoring, Liquidation, and Security Design

Rafael Repullo1,2; Javier Suarez

1 Center for Economic and Policy Research · 2 Centro de Estudios Monetarios y Financieros

Review of Financial Studies 1998

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.

DOI
10.1093/rfs/11.1.163
Volume
11 (1)
Pages
163-187
Language
en
Export
BibTeX
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