Equity, Bonds, and Bank Debt: Capital Structure and Financial Market Equilibrium under Asymmetric Information

By Patrick Bolton, Xavier Freixas. Journal of Political Economy, 2000

715 citations recorded by the source corpus.

This paper proposes a model of financial markets and corporate finance, with asymmetric information and no taxes, where equity issues, bank debt, and bond financing coexist in equilibrium. The relationship banking aspect of financial intermediation is emphasized: firms turn to banks as a source of investment mainly because banks are good at helping them through times of financial distress. This financial flexibility is costly since banks face costs of capital themselves (which they attempt to minimize through securitization). To avoid this intermediation cost, firms may turn to bond or equity financing, but bonds imply an inefficient liquidation cost and equity an informational dilution cost. We show that in equilib‐rium the riskier firms prefer bank loans, the safer ones tap the bond markets, and the ones in between prefer to issue both equity and bonds. This segmentation is broadly consistent with stylized facts.

Subfields: Accounting, Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/a960343b0bdfc9581e9abe4e16bf3eef34f5df72

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Citations in the corpus

Relationship and Transaction Lending in a Crisis (2013, neutral): “We assume for simplicity that the intermediation cost of dealing with a bank, whether T bank or R bank is entirely capitalized in period 0 and re ected in the respective costs of funds, T and R:We will assume as in Bolton and Freixas (2000, 2006) thatH rms move rst and L rms second.”
Which Financial Frictions? Parsing the Evidence from the Financial Crisis of 2007 to 2009 (2013, background): “Bolton and Freixas (2000) focus instead on the greater fl exibility of bank credit in the face of shocks, as discussed by Berlin and Mester (1992), with the implication that fi rms with higher default probability favor bank fi - nance relative to bonds.”
Stock Market Development and Economic Growth (2006, background): “Under such circumstances, Bolton and Frexias (2000) show that firms' optimal capital structure consists of two main forms of securities: equity and/or debt.”
The Failure of Models that Predict Failure: Distance, Incentives and Defaults (2010, neutral): “By assumption, (5) and (6) are both satisfied.”
Debt Capacity and Tests of Capital Structure Theories (2010, background): “Furthermore, Bolton and Freixas also suggest measures of firm risk or firm age as alternative proxies for debt capacity. Holmstrom and Tirole (1997) also provide a model in which the presence or absence of public or rated debt is related to the firm’s level of debt capacity.”
Does the Source of Capital Affect Capital Structure (2003, neutral): “In addition, financial intermediaries may be more efficient at restructuring firms that are in financial distress [Bolton and Freixas (2000), Bolton and Scharfstein (1996), and Rajan (1992)].”
Credit Derivatives, Disintermediation and Investment Decisions (2005, neutral): “Bolton and Freixas (2000) provide a model in which banks are better able to renegotiate loans when borrowers are financially fragile, but are also more expensive, as a consequence of costly capital adequacy requirements.”
Loan Pricing Under Basel Capital Requirements (2004, methodology): “(4) 11We are implicitly assuming that the firms’ net success return a is sufficiently large, so a > rj for j = l, h.”
Trade Credit, Bank Lending and Monetary Policy Transmission (2003, background): “For example theoretical research has been developed to allow bank lending and a capital market to co-exist even though the former is more expensive (see Diamond, 1991; Besanko and Kanatas, 1993; Hoshi et al., 1993; Holmstrom and Tirole, 1997; Bolton and Freixas, 2000; Repullo and Suarez, 2000).”
The international zero-leverage phenomenon (2013, neutral): “Based on Bolton and Freixas’ (2000) extended pecking order model of financing instruments, Lemmon and Zender (2010) argue that a firm’s ability to issue public (rated) debt indicates a large debt capacity.”
What Determines the Financing Decision in Corporate Takeovers: Cost of Capital, Agency Problems, or the Means of Payment? (2008, positive): “Therefore, following the predictions of Bolton and Freixas (2000), we hypothesize that: AG3(b) Firms with high volatility are more likely to choose debt financing in takeover deals.”
Large debt financing: syndicated loans versus corporate bonds (2010, neutral): “There is extensive theoretical literature concerned with the coexistence of bank lending and direct bond financing (Besanko and Kanatas 1993; Hoshi, Kashyap, and Scharfstein 1993; Chemmanur and Fulghieri 1994; Holmstrom and Tirole 1997; Boot and Thakor 2000; Bolton and Freixas 2000).”