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Agency Cost of Debt and Credit Market Imperfections: A Bargaining Approach
Author(s) -
Koskela Erkki,
Stenbacka Rune
Publication year - 2004
Publication title -
bulletin of economic research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.227
H-Index - 29
eISSN - 1467-8586
pISSN - 0307-3378
DOI - 10.1111/j.1467-8586.2004.00210.x
Subject(s) - bargaining power , economics , agency cost , debt , loan , agency (philosophy) , investment (military) , monetary economics , bond market , trade credit , finance , microeconomics , corporate governance , philosophy , epistemology , politics , political science , law , shareholder
This paper studies the effect of credit market imperfections, measured by the relative bargaining power of banks, on the agency costs of debt finance. The threshold of obtaining loan finance is shown to be independent of the relative bargaining power of the financier. However, lower relative bargaining power of banks leads to lower lending rates and investment return distributions with lower, but less risky returns. Thus, our analysis does not support the view, presented in a large existing literature, that there would be a trade‐off between reduced credit market imperfections and higher agency costs of debt finance.