Insiders and Outsiders: The Choice between Informed and Arm's-Length Debt (1992)
| Venue: | Journal of Finance |
| Citations: | 295 - 16 self |
BibTeX
@ARTICLE{Rajan92insidersand,
author = {Raghuram G. Rajan and David Scharfstein and Steven Sharpe and Jeremy Stein and Rene Stulz (the and Miguel Villas-boas},
title = {Insiders and Outsiders: The Choice between Informed and Arm's-Length Debt},
journal = {Journal of Finance},
year = {1992},
pages = {1367--1400}
}
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Abstract
While the benefits of bank financing are relatively well understood, the costs are not. This paper argues that while informed banks make flexible financial decisions which prevent a firm's projects from going awry, the cost of this credit is that banks have bargaining power over the firm's profits, once projects have begun. The firm's portfolio choice of borrowing source and the choice of priority for its debt claims attempt to optimally circumscribe the powers of banks.
