Working Paper: NBER ID: w28377
Authors: Douglas W. Diamond; Yunzhi Hu; Raghuram G. Rajan
Abstract: We develop a theory of how corporate lending and financial intermediation change based on the fundamentals of the firm and its environment. We focus on the interaction between the prospective net worth or liquidity of an industry and the firm’s internal governance or pledgeability. Variations in prospective liquidity can induce changes in the nature, covenants, and quantity of loans that are made, the identity of the lender, and the extent to which the lender is leveraged. We offer predictions on how these might vary over the financial cycle.
Keywords: corporate lending; financial intermediation; liquidity; pledgeability; governance
JEL Codes: G2; G21; G23; G3; G32; G33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Higher prospective corporate liquidity (G33) | reliance on monitored bank borrowing (G21) |
| Higher prospective corporate liquidity (G33) | arms-length lending (G21) |
| Higher prospective corporate liquidity (G33) | need for internal governance (G38) |
| Increased liquidity (G19) | borrow more arms-length (G51) |
| borrowing more arms-length (G51) | necessity for internal governance mechanisms (G38) |
| Increased prospective liquidity (G19) | operate with less capital (G31) |
| Increased prospective liquidity (G19) | operate with higher leverage (G32) |
| Higher liquidity (G19) | pledgeability (G32) |