Capital Structure and the Informational Role of Debt

Harris, Milton; Raviv, Artur

doi:10.1111/j.1540-6261.1990.tb03693.x

Cited by 904 publications

(423 citation statements)

References 21 publications

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“…Moreover, there are several other explanations for the ine ciencies that we assume to be associated with the monopoly rent of banks and the debt-equity relation. See, for instance, Harris and Raviv (1990) and Aghion and Bolton (1992).…”

Section: Monopolistic Banking Systemmentioning

confidence: 99%

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Banks, Markets, and Efficiency

Fecht

Martin

2005

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractIn this paper, we address the question whether increasing households' financial market access improves welfare in a financial system in which there is intense competition among banks for private households' funds. Following earlier work by Diamond and by Fecht, we use a model in which the degree of liquidity insurance offered to households through banks' deposit contracts is restrained by households' financial market access. However, we also assume spatial monopolistic competition among banks. Because monopoly rents are assumed to bring about inefficiencies, improved financial market access that limits monopoly rents also entails a positive effect; however, this beneficial effect is only relevant if competition among banks does not sufficiently restrain monopoly rents already.Thus, our results suggest that in Germany's bank-dominated financial system, which is characterized by intense competition for households' deposits, improved financial market access might reduce welfare because it only reduces risk sharing. In contrast, in the U.S. banking system, where there is less competition for households' deposits, a high level of household financial market participation might be beneficial.

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Section: Monopolistic Banking Systemmentioning

confidence: 99%

“…4 See von Thadden (1999) for a detailed survey of the various approaches that allow for a coexistence of a nancial market and a deposit taking bank that provides liquidity insurance. 5 See Harris and Raviv (1990) and Aghion and Bolton (1992) who model the disciplining role of debt.…”

Section: Introductionmentioning

confidence: 99%

Banks, Markets, and Efficiency

Fecht

Martin

2005

SSRN Journal

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“…However, instead of a transfer of information from insiders to outsiders, the present analysis focuses on the transfer of information between outsiders, i.e., bond and stock investors. Similar to our model, Harris and Raviv (1990) study the firm's capital choice in an environment where the firm's indebtedness influences information revelation. In the model of Harris and Raviv (1990), firms produce output using an unobservable technology.…”

Section: Introductionmentioning

confidence: 99%

“…Similar to our model, Harris and Raviv (1990) study the firm's capital choice in an environment where the firm's indebtedness influences information revelation. In the model of Harris and Raviv (1990), firms produce output using an unobservable technology. In turn, outside investors observe whether the firm can service its debt.…”

Section: Introductionmentioning

confidence: 99%

Information Aggregation Through Stock Prices and the Cost of Capital

Gorelkina

Kuhle

2013

SSRN Journal

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This paper studies a firm's optimal capital structure in an environment, where the firm's stock price serves as a public signal for its credit worthiness. In equilibrium, equity investors choose whether to acquire information and to trade the firm's equity. This induces a positive relation between the amount of equity issued and the stock price signal's precision. Thus, through its capital structure, the firm can internalize the informational externality that stock prices exert on bond yields. Firms with a strong fundamental therefore issue more equity and less debt than they would if the informational spill-over did not exist.

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“…In contrast, Carletti, Hartmann, and Spagnolo (2003) analyze the e ect of bank mergers 5 See Harris and Raviv (1990) and Aghion and Bolton (1992) who model the disciplining role of debt.…”

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confidence: 99%

Banks, markets, and efficiency

Fecht

Martin

2008

Ann Finance

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Abstract:Following Diamond (1997) and Fecht (2004) we use a model in which nancial market access of households restrains the e ciency of the liquidity insurance that banks' deposit contracts provide to households that are subject to idiosyncratic liquidity shocks. But in contrast to these approaches we assume spacial monopolistic competition among banks.Since monopoly rents are assumed to bring about ine ciencies, improved nancial market access that limits monopoly rents also entails a positive e ect. But this bene cial e ect is only relevant if competition among banks does not su ciently restrain monopoly rents already.Thus our results suggest that in the bank-dominated nancial system of Germany, in which banks intensely compete for households' deposits, improved nancial market access might reduce welfare because it only reduces risk sharing. In contrast, in the banking system of the U.S., with less competition for households' deposits, a high level of households' nancial market participation might be bene cial. Within a theoretical model the present paper tries to evaluate the welfare implications of having an intense competition between banks for households funds instead of having a strong competition between bank products and more nancial market related investments.In general, competition within the nancial sector is bene cial because this limits banks' monopoly power and thereby reduces the ine ciencies associated with this monopoly power. However, depending on the speci c type of competition within the nancial sector competition might also incur some welfare costs. In particular, competition between bank deposits and market related investments reduces the liquidity insurance that can be provided by deposit contracts.In general, bank deposits o er an insurance against idiosyncratic liquidity risks: they pay a comparably high return if funds are needed after a short period, but pay less than alternative long-term investments if held for a longer period. Thus deposits implement a redistribution of funds from those agents that do not have an immediate liquidity need to those that cannot postpone their consumption. However, if there is strong competition between bank deposits and market related assets then those households that do not have an immediate liquidity need can e ciently withdraw from this redistribution scheme and invest into alternative long-term assets. Thus the more e cient the access to marketrelated investments the less risk-sharing can be provided by bank deposits. Consequently, in a nancial system in which banks' market power in the deposit business is limited by the competition with market related investments, an increasing competition reduces banks' market power but comes at the costs of less e cient risk-sharing.In contrast, competition between banks does not entail this negative welfare e ect.A more intense competition for deposits between banks does not reduce the e ciency of the liquidity insurance provided by banks' deposit contracts. The deposit contract of all banks entails the same o...

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Capital Structure and the Informational Role of Debt

Cited by 904 publications

References 21 publications

Banks, Markets, and Efficiency

Banks, Markets, and Efficiency

Information Aggregation Through Stock Prices and the Cost of Capital

Banks, markets, and efficiency

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