Insiders and Outsiders: The Choice between Informed and Arm's‐Length Debt
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.
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Firms with access to public debt markets may try to reduce the control of their banks by issuing public debt, even though public debt may entail higher costs.
“Some research suggests that these ®rms may try to reduce the control of their banks by issuing public debt, even though public debt may entail higher costs (Diamond, 1991(Diamond, , 1993;;Rajan, 1992;Houston and James, 1996).”
From The economics of small business finance: The roles of private equity and debt markets in the financial growth cycle (1998) · cites this paper as Rajan, 1992
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“Some research suggests that these firms may try to reduce the control of their banks by issuing public debt, even though public debt may entail higher costs (Diamond 1991, 1993, Rajan 1992, Houston and James 1996).”
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- Authors
- RAJAN, R. G.
- Affiliations
- University of Chicago (US)
- Corresponding author
- RAJAN, RAGHURAM G.
- ORCID
- RAJAN, RAGHURAM G.
- Venue
- The Journal of Finance
- Publisher
- Wiley
- Published
- 1992-09
- Volume
- 47
- Issue
- 4
- Pages
- 1367-1400
- ISSN
- 0022-1082 (ISSN-L)
- 1540-6261
- OpenAlex
- W2055324653
- Cited by
- 3,902
- References
- 0
- Citations by year
- 2026: 29 · 2025: 110 · 2024: 137 · 2023: 163 · 2022: 137 · 2021: 201 · 2020: 164 · 2019: 151 · 2018: 159 · 2017: 165 · 2016: 154 · 2015: 163 · 2014: 156 · 2013: 152 · 2012: 196
- FWCI
- 80.71
- Type
- journal article
- Language
- en
- Open access
- closed
- Locations
- The Journal of Finance (publishedVersion)
- RePEc: Research Papers in Economics (submittedVersion)
- Topics
- Social Sciences › Business, Management and Accounting › Accounting › Corporate Finance and Governance
- Social Sciences › Economics, Econometrics and Finance › Finance › Banking stability, regulation, efficiency
- Social Sciences › Business, Management and Accounting › Accounting › Corporate Insolvency and Governance
- Keywords
- bank financing, project financing, bank-firm relationships, capital structure
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