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<p>We use a model to study the financing decisions of a firm when the economic outlook is uncertain. Funding is available from competitive lenders, one of which, at added cost, can monitor the firm and make an informed choice about early liquidation. Under imperfect contracting, we derive a set of competitive loan contracts that induce the informed lender to shape its monitoring activity according to the observed economic conditions. We also find that as the economic outlook worsens, it is more likely that the firm will seek this kind of conditional monitoring by an informed lender.</p>

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Bank Monitoring and the Business Cycle

  • 期刊论文

  • 发表日期：

    2025年3月11日

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  • Eric Van Tassel

摘要

We use a model to study the financing decisions of a firm when the economic outlook is uncertain. Funding is available from competitive lenders, one of which, at added cost, can monitor the firm and make an informed choice about early liquidation. Under imperfect contracting, we derive a set of competitive loan contracts that induce the informed lender to shape its monitoring activity according to the observed economic conditions. We also find that as the economic outlook worsens, it is more likely that the firm will seek this kind of conditional monitoring by an informed lender.