Relationship Finance, Informational Rent, and Observational Indistinguishability from Short-Termism

Relationship intermediaries specialise in alleviating information asymmetry, but the literature remains vague on precisely what information they acquire and how they put such information to use. This paper characterises explicitly a particular class of signal extraction and studies the optimal funding policy that maximises the associated informational rents. Because it strikes the optimal trade-ofi between present and future periods, this funding policy cannot be labelled short-termist. Yet if the relationship intermediary's ROC curve is kinked, this intertemporally optimal funding policy may nevertheless appear indistinguishable from short-termism to the uninformed outside observer.