Work

Monitoring and Reputation: The Choice between Bank Loans and Directly Placed Debt

Year: 1991

Type: article

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.

Source: Journal of Political Economy

DOI: 10.1086/261775

Author: Douglas W. Diamond

Institutions: Federal Reserve, University of Chicago

Language: English

Topic: Banking stability, regulation, efficiency

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: green

Funders: National Science Foundation, Yale University, University of Chicago, Yale School of Management

Award: Information and Debt Markets: Reputation, Financial Intermediation and Optimal Maturity Structure