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Long-term debt and hidden borrowing

Bar-Isaac, Heski and Cuñat, Vicente (2014) Long-term debt and hidden borrowing. Review of Corporate Finance Studies, 3 (1-2). pp. 87-122. ISSN 2046-9128

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Abstract

Borrowers can raise funds from a competitive banking sector that shares information and from opaque hidden lenders. Hidden lenders allow borrowers to conceal poor results, and thereby affect contracts in the banking sector. In equilibrium, borrowers obtain funds from both sectors simultaneously. The lack of transparency generates cross-subsidies between different borrowers who are observationally equivalent to banks and face the same interest rate. As the cost of hidden borrowing falls, an increasing number of borrowers face identical terms; for sufficiently low costs, all borrowers who take loans (which may include inefficient borrowers) use the same bank debt contract.

Item Type: Article
Official URL: http://rcfs.oxfordjournals.org/
Additional Information: © 2014 The Authors
Subjects: H Social Sciences > HG Finance
Sets: Departments > Finance
Identification Number: 10.1093/rcfs/cfu007
Date Deposited: 17 Apr 2015 14:15
Last Modified: 21 Apr 2015 15:14
URI: http://eprints.lse.ac.uk/id/eprint/61626

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