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Bankruptcy Litigation and Relationship Banking
Author(s) -
Marini François
Publication year - 2013
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/jbfa.12011
Subject(s) - bankruptcy , insolvency , diversification (marketing strategy) , creditor , debt , intermediation , business , value (mathematics) , actuarial science , economics , monetary economics , finance , mathematics , statistics , marketing
This paper analyzes how bankruptcy litigation affects the value of relationship banking. In our model, bankruptcy courts may make type 1 errors, i.e., they may declare that an insolvent firm is solvent; and they may make type 2 errors, i.e., they may declare that a solvent firm is insolvent. Our model provides four results. First, the cost of bank debt decreases when the probability that bankruptcy courts make type 2 errors increases. Second, the value of relationship banking increases when the probability that bankruptcy courts make type 1 errors increases. Third, the cost of credit intermediation decreases when the probability that bankruptcy courts make type 2 errors increases. Fourth, the diversification mechanism does not fully solve the delegated monitoring problem.