امور مالی مستقیم در مقابل امور مالی واسطه: یک سوال قدیمی و پاسخ های جدید

We consider a closed economy where a risk neutral bank competes with a competitive bond market. Firms can finance a risky project either by a bank credit or by issuing a bond which is directly sold to risk averse investors who also hold safe deposits at the bank. We show that the bank tends to allocate more capital to lower quality projects but there are some interesting qualifications. If the asymmetric information concerns only the success probability, then we observe adverse selection while if it concerns only the expected return, bad types are driven out of the market.

Corporations have to rely on external financing whenever internal cash flows are too small to finance new projects. The largest fraction of external financing by U.S. nonfinancial corporations comes from debt, while net equity issues are mostly negative.1 The starting point of our paper is a striking observation concerning the corporate debt structure in the presence of private (bank) and public debt markets (bonds). There is significant empirical evidence of the fact that bad risks are predominantly financed by banks while good risks obtain most of their funds from public debt markets. An early study by James (1987) shows that firms announcing new bank loans and privately placed debt have a higher default risk and are on average smaller than those announcing publicly placed straight debt offerings. In an analysis of corporate financing in Japan, Hoshi et al. (1993) find that high net worth firms are more likely to use public than bank debt. Johnson (1997) presents evidence of the fact that the proportion of bank debt is negatively related to firm size and age and positively related to leverage and to earnings growth volatility. All these characteristics can serve as proxies for credit risk: Small and young firms as well as highly leveraged firms or firms with high earnings growth volatility can generally be considered more risky than firms with the opposite characteristics. Similar results for more general private debt are reported in Krishnaswami et al. (1999). Finally, the tremendous growth of the market for credit derivatives in the last decade can also be viewed as evidence for the risk accumulation by banks.2 The theoretical literature that provides explanations for the observed debt structure of firms is large and too extensive to be reviewed in detail. Hence, we only give a brief overview over the proposed explanations and contrast them with the contribution of this paper. The literature mainly focusses on three aspects that can explain the choice between bank loans and public debt, namely information costs, monitoring and renegotiation. The information cost aspect was stressed by Fama (1985) who pointed out that the issue of public debt requires the provision of information for a large group of potential debt holders (via bond ratings or audits) while there is only one contracting party in case of a bank loan. Fama (1985) concluded that the information cost for public debt financing is higher for smaller than for larger firms, so that small firms prefer bank loans while large firms prefer public debt. This prediction is consistent with the empirical evidence in James (1987) and Johnson (1997). In the sequel several authors have pointed out that a bank loan involves close monitoring of the financed project which is not the case for publicly traded debt. Several papers take this monitoring activity to be the defining characteristic of a bank. Since monitoring is costly bank loans are more expensive than public debt and hence only those firms rely on bank credit which require monitoring. These can be firms that have not built up a reputation of repaying their debt as in Diamond (1991) or firms that are highly leveraged so that the market does not expect them to behave diligently if they are not monitored as in Holmstrom and Tirole (1997). These predictions are consistent with the empirical observation that firms announcing new bank loans have a higher default risk (James, 1987) and have a higher leverage (Johnson, 1997) than firms announcing the issue of public debt. Finally, it is much easier to renegotiate a bank loan than publicly traded debt since the holders of public debt are typically widely dispersed while a bank loan only involves one contracting partner. Debt renegotiation can prevent inefficient liquidation and hence firms with a high probability of financial distress prefer bank loans over bonds (see Chemmanur and Fulghieri, 1994 and Bolton and Freixas, 2000). This prediction is consistent with the observation that bank debt is increasing in the earnings growth volatility (see Johnson, 1997). Also, as Rajan (1992) argues, debt renegotiation is costly since banks gain bargaining power over the firm's profits once projects have begun. He concludes that firms with high quality (=high=high success probability) projects will prefer public debt while those with low quality projects prefer bank loans, which is consistent with the empirical evidence in James (1987). The contribution of our paper is to offer an alternative and to some extent much simpler answer to the old question, why banks tend to allocate more capital to riskier or more general lower quality projects. Our emphasis is on the role of banks in diversifying risks. While the previous literature has focussed on a risk neutral world, where there is an infinitely elastic supply of funds at an exogenously given interest rate, we take the view that risk aversion is a predominant phenomenon, which has to be taken into account in any full model of bank and capital market lending. We will show that the investors’ risk aversion alone together with the bank's ability to diversify risk can explain the debt allocation between banks and bond markets. In order to derive the implications of a bank's risk diversification activity we disregard the monitoring role of banks and choose a setting with asymmetric information prior to contracting (firms have a given project type prior to contracting). In our model a monopolistic bank faces competition from a bond market which limits the rent extraction of the bank. Hence we combine a principal-agent situation with a competitive market.3 Risk neutral firms seek finance for projects and can obtain credit from the bank or issue bonds. There are two types of firms which differ in the quality of their project. Only the proportions of the two types of firms are common knowledge while the type of a single firm is its private information. Following Hellmann and Stiglitz (2000) we measure project quality along two dimensions, namely the expected return and the success probability of a project. Risk averse investors can invest their capital in safe bank deposits or in risky bonds. Investment in bonds is risky because by assumption investors cannot diversify their risk at the bond market. This assumption can be justified by the fact that building a well diversified fund of bonds is too costly for individual investors. By contrast the bank can diversify its risk by giving loans to a pool of firms. The bank sets the credit volume and the interest rates on deposits and credit such as to maximize expected profits. In doing so it anticipates the equilibrium on the bond market. The firms in our model have no financial resources and there is no equity market. Hence, collateral cannot serve as a screening device and the bank can only screen the firms by setting the interest rate so high that one firm type does not invest at all. In this case we say that the economy is in a “screening equilibrium,” while a “pooling equilibrium” refers to the case where both types of firms invest. Different from most models on direct versus intermediated finance4 we find that generically there is a mix of financing source in equilibrium, i.e. firms obtain finance from the bank as well as by issuing bonds. This prediction is confirmed by several empirical studies (see, for example, Houston and James, 1996 and Johnson, 1997). Moreover, our model can explain the stylized fact that bad risks receive more finance from the bank relative to the bond market than good risks. The reason is that in the presence of a riskless deposit contract, which is offered by the bank, the investors’ demand for bonds increases with the expected return and decreases with the default risk of the bonds. In equilibrium the credit volume is equal to the capital required by the firms in excess over what they obtain on the bond market. Hence, the credit volume is decreasing in the expected return and increasing in the default risk. The latter result is consistent with the observation that the proportion of bank debt is increasing in credit risk (see, for example, James, 1987 and Johnson, 1997).5 In addition we obtain interesting results concerning the nature of the equilibrium (pooling or screening). If firms only differ in the success probability of their projects our model predicts that there will be a pooling equilibrium, whenever the proportion of high risk projects in the economy is small, and a screening equilibrium, whenever the proportion is large. In the latter case the low risks are driven out of the market. This is the classic adverse selection effect. If, on the contrary, firms only differ in the expected return of their projects, then there is pooling for small proportions of the “good” project (high expected return) while there is screening if its proportion in the economy is large. If there is screening we observe a positive selection effect, meaning that the low return project is driven out of the market. These results are very intuitive: If the proportion of firms that are able to pay a high interest rate on credit gets sufficiently large, it is optimal for the bank to violate the participation constraint for the firms with a low willingness to pay, i.e. we have a screening equilibrium. Since the firms’ willingness to pay is increasing in the expected return of the project and decreasing in the success probability we obtain the selection effects described above. These predictions have not been obtained by the previous literature and to our knowledge there is no empirical study that has compared the characteristics of projects that have been financed by bank debt with those that were refused a credit. Subject to the availability of detailed data on bank lending this would clearly be an interesting research topic. Our paper is organized as follows. In Section 2 we set up the model and derive first results concerning admissible contracts for the bank. The optimal contract for the bank is determined in Section 3, where we also discuss some extensions of the model. We conclude the paper in Section 4. All proofs are in the appendix.

We have presented a simple model of a closed economy where a bank competes with a bond market on both sides of its balance sheet: Consumers can invest their capital in risky bonds and in safe deposits and firms can issue bonds and obtain a bank credit. Therefore, when setting the credit volume and the interest rates, the bank has to take into account the resulting equilibrium on the bond market. In particular, the bank does not face an infinitely elastic supply of funds at an exogenously given interest rate as it is commonly assumed in the literature. Different from most models on direct versus intermediated finance in the literature our results predict a mix of financing source, i.e. neither the bank nor the bond market has its own clientele. This is confirmed by several empirical studies showing that a large fraction of firms has a mix of bank and public debt outstanding (Houston and James, 1996 and Johnson, 1997), i.e. bank lending remains an important source of finance even if firms have access to public debt markets. Moreover, we have seen that the credit volume is increasing in the default risk and decreasing in the expected return of the financed projects. This provides a new explanation for the fact that banks allocate more capital to lower quality projects. Unlike earlier work, which has focused on monitoring and relationship banking, our results are driven by the risk aversion of investors and the bank's ability to diversify risk. We do not claim that the monitoring or relationship aspect of banking is not important in explaining the allocation of capital across risky projects. Instead, we want to point out that there is an additional, much simpler explanation, which does not appeal to very sophisticated bank services like monitoring or contract renegotiation and which seems to have been overlooked so far. Risk aversion is a predominant phenomenon and it should come at no surprise that it has significant influence on the allocation of capital and risk in an economy. Our model also has interesting implications for the case where the proportion of the high risk and/or high expected return project gets large. In this case we have seen that there will be a screening equilibrium with adverse selection, whenever firms only differ in the default risk, and a screening equilibrium with positive selection, whenever firms only differ in the expected return of their projects. Putting this prediction to an empirical test could be very insightful since other theoretical models have not produced similar results.20 It would be desirable to distinguish empirically our explanation for the role of banks in project financing from other explanations that have been provided in the literature. However, hard evidence on the relative importance of monitoring, relationship banking and risk diversification may be difficult if not impossible to obtain, so the best we can do is to test the predictions of the theoretical models. In this respect, as we have seen, our model performs very well.