Why Is Bank Debt Senior? A Theory of Asymmetry and Claim Priority Based on Influence Costs

Welch, Ivo

doi:10.1093/rfs/10.4.1203

Cited by 147 publications

(96 citation statements)

References 34 publications

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“…Elsas and Khranen (2000) justify their result with the argument made by Welch (1997) and Longhofer and Santos (2000), who show that it is optimal for bank debt to be more senior when lending relationships are stronger.…”

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confidence: 88%

Secured Lending and Borrowers' Riskiness

Pozzolo

2002

SSRN Journal

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This paper investigates the relationship between secured lending and borrowers' riskiness. First it builds a theoretical model showing that banks may find optimal to cover higher credit risk by requiring a guarantee and simultaneously charging higher interest rates. Second, it finds empirical support to the predictions of the model, that banks normally require guarantees on loans that appear to be riskier, because they are larger or because they are granted to borrowers of smaller size, less capitalized, and with multiple banking relationships. It also provides evidence that a bank loan is more likely to be secured when the borrower owns assets that can be posted as collateral. Third, it shows that interest rates on secured loans are higher than on unsecured loans, confirming that guarantees are not sufficient to completely offset their higher riskiness. Finally, it finds no evidence that the higher riskiness of firms operating in the new economy sectors makes it more likely that they obtain bank credit only on a secured basis. JEL-classification: G21, G32

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confidence: 88%

Secured Lending and Borrowers' Riskiness

Pozzolo

2002

SSRN Journal

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“…4 A related group of papers explains why bank debt is usually senior, even though junior creditors should have greater incentives for monitoring. Welch (1997) shows that because of their strength and organization, banks are in a better position to contest bankruptcy plans that they do not like. When they are senior creditors, this deters the junior creditors from contesting the plan.…”

Section: Related Workmentioning

confidence: 99%

“…Our model is simpler than previous models in several ways; however, it adds a very important feature to the analysis, namely, as in Welch (1997) we allow for violations of the absolute priority rule (APR) in bankruptcy. The conflict that is introduced between debt holders of different priorities has an effect on the proceeds from financing at different seniority levels.…”

Section: Related Workmentioning

confidence: 99%

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Conflicts in Bankruptcy and the Sequence of Debt Issues

2009

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“…Thus, these studies find that dual holding can benefit firms by promoting their access to bank capital and improving their performance (Kang et al, 2000;Mahrt-Smith, 2006;Jiang et al, 2010). Meanwhile, another strand of studies focuses on the harmful effects of dual holding, arguing that it leads to potentially more serious conflicts of interest (Diamond, 1984;Welch, 1997). Empirical evidence suggests that, although dual holdings allow firms in emerging markets to have better access to debt financing, banks do not monitor these firms quite so extensively, which may result in poorer firm performance Luo et al, 2011).…”

Section: Introductionmentioning

confidence: 99%

Does banks’ dual holding affect bank lending and firms’ investment decisions? Evidence from China

Pan

Tian

2015

Journal of Banking & Finance

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This study investigates the effect of banks' dual holding on bank lending and firms' investment decisions using a sample of listed firms in China. We find that dual holding leads to easier access to bank loans, a result that is more pronounced for non-state-owned enterprises (non-SOEs) than SOEs. We also find that dual holding distorts banks' lending decisions and harms the investment efficiency for SOEs, while resulting in optimal lending decisions and enhanced investment efficiency for non-SOEs. For non-SOEs, further analysis suggests that optimal lending decisions and efficient investment can be achieved for firms with higher ownership concentration, and firms in which the family and foreign investors are the controlling shareholders. We argue that, in emerging markets, whether a bank plays a monitoring role by directly holding the debt and equity claims of companies relies heavily on whether the potential collusion between firm executives and bank managers can be averted, which in turn is determined by the firms' governance framework and ownership structure. AbstractThis study investigates the effect of banks' dual holding on bank lending and firms' investment decisions using a sample of listed firms in China. We find that dual holding leads to easier access to bank loans, a result that is more pronounced for non-state-owned enterprises (non-SOEs) than SOEs. We also find that dual holding distorts banks' lending decisions and harms the investment efficiency for SOEs, while resulting in optimal lending decisions and enhanced investment efficiency for non-SOEs. For non-SOEs, further analysis suggests that optimal lending decisions and efficient investment can be achieved for firms with higher ownership concentration, and firms in which the family and foreign investors are the controlling shareholders. We argue that, in emerging markets, whether a bank plays a monitoring role by directly holding the debt and equity claims of companies relies heavily on whether the potential collusion between firm executives and bank managers can be averted, which in turn is determined by the firms' governance framework and ownership structure.

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Why Is Bank Debt Senior? A Theory of Asymmetry and Claim Priority Based on Influence Costs

Cited by 147 publications

References 34 publications

Secured Lending and Borrowers' Riskiness

Secured Lending and Borrowers' Riskiness

Conflicts in Bankruptcy and the Sequence of Debt Issues

Does banks’ dual holding affect bank lending and firms’ investment decisions? Evidence from China

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