Journal of Political Economy Vol. 99 No. 4 1991
Monitoring and Reputation: The Choice between Bank Loans and Directly Placed Debt
open access
Abstract
This paper determines when a debt contract will be monitored by lenders. This is the choice between borrowing directly (issuing a bond, without monitoring) and borrowing through a bank that monitors to alleviate moral hazard. This provides a theory of bank loan demand and of the role of monitoring in circumstances in which reputation effects are important. A key result is that borrowers with credit ratings toward the middle of the spectrum rely on bank loans, and in periods of high interest rates or low future profitability, higher-rated borrowers choose to borrow from banks.
- DOI
- 10.1086/261775
- Volume
- 99
- Issue
- 4
- Pages
- 689-721
- Language
- en
- Sources
- openalex crossref