This paper proposes a model of financial markets and corporate finance,
with asymmetric information and no taxes, where equity issues, Bank
debt and Bond financing may all co-exist in equilibrium. The paper
emphasizes the relationship Banking aspect of financial intermediation:
firms turn to banks as a source of investment mainly because banks are
good at helping them through times of financial distress. The debt
restructuring service that banks may offer, however, is costly. Therefore,
the ...
This paper proposes a model of financial markets and corporate finance,
with asymmetric information and no taxes, where equity issues, Bank
debt and Bond financing may all co-exist in equilibrium. The paper
emphasizes the relationship Banking aspect of financial intermediation:
firms turn to banks as a source of investment mainly because banks are
good at helping them through times of financial distress. The debt
restructuring service that banks may offer, however, is costly. Therefore,
the firms which do not expect to be financially distressed prefer to
obtain a cheaper market source of funding through bond or equity issues.
This explains why bank lending and bond financing may co-exist in
equilibrium. The reason why firms or banks also issue equity in our model
is simply to avoid bankruptcy. Banks have the additional motive that they
need to satisfy minimum capital adequacy requeriments. Several types of
equilibria are possible, one of which has all the main characteristics of
a "credit crunch". This multiplicity implies that the channels of monetary
policy may depend on the type of equilibrium that prevails, leading
sometimes to support a "credit view" and other times the classical "money
view".
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