Debt, liquidity constraints, and corporate investment: evidence from panel data

Article Abstract:

This paper presents evidence supporting the theory that problems of asymmetric information in debt markets affect financially unhealthy firm's ability to obtain outside finance and, consequently, their allocation of real investment expenditure over time. I test this hypothesis by estimating the Euler equation of an optimizing model or investment. Including the effect of a debt constraint greatly improves the Euler equation's performance in comparison to the standard specification. When the sample is split on the basis of two measures of financial distress, the standard Euler equation fits well for the a priori unconstrained groups, but is rejected for the others. (Reprinted by permission of the publisher.)

Investments, Corporations, Liquidity (Finance), Credit market, Credit markets

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Insiders and outsiders: the choice between informed and arm's-length debt

Article 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. (Reprinted by permission of the publisher.)

Commercial Banks, Banking industry, Bank loans

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Monitoring and structure of debt contracts

Article Abstract:

A model is presented depicting the optimal debt structure, which is characterized as a contract delegating monitoring to a primary senior lender in which the seniority permits the lender to appropriate full return from any monitoring activity. Explanations include why short-term debt supercedes long-term debt and why contracts regarding debt are prioritized.

Debt & Capital Management, Statistical Data Included, Interpretation and construction, Laws, regulations and rules, Risk (Economics), Contracts, Financial management, Debtor and creditor

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