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Internal Finance versus Bank Debt: The Gains from Establishing a Debt History

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Bester, H., Scheepens, J. Internal Finance versus Bank Debt: The Gains from Establishing a Debt History. Credit and Capital Markets – Kredit und Kapital, 29(4), 565-591. https://doi.org/10.3790/ccm.29.4.565
Bester, Helmut and Scheepens, Joris P. J. F. "Internal Finance versus Bank Debt: The Gains from Establishing a Debt History" Credit and Capital Markets – Kredit und Kapital 29.4, 1996, 565-591. https://doi.org/10.3790/ccm.29.4.565
Bester, Helmut/Scheepens, Joris P. J. F. (1996): Internal Finance versus Bank Debt: The Gains from Establishing a Debt History, in: Credit and Capital Markets – Kredit und Kapital, vol. 29, iss. 4, 565-591, [online] https://doi.org/10.3790/ccm.29.4.565

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Internal Finance versus Bank Debt: The Gains from Establishing a Debt History

Bester, Helmut | Scheepens, Joris P. J. F.

Credit and Capital Markets – Kredit und Kapital, Vol. 29(1996), Iss. 4 : pp. 565–591 | First published online: December 13, 2022

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Helmut Bester, Berlin and Amsterdam

Joris P. J. F. Scheepens, Berlin and Amsterdam

References

  1. Ang, J. S. and Jung, M., 1993: An alternate test of Myers’ pecking order theory of capital structure: the case of South Korean firms, Pacific-Basin Finance Journal 1, 31-46.  Google Scholar
  2. Baumol, William J., 1952: The transactions demand for cash: An inventory theoretic approach, Quarterly Journal of Economics 66, 545-56.  Google Scholar
  3. Berger, Allen N. and Udell, Gregory F., 1994: Lines of credit and relationship lending in small firm finance, mimeo.  Google Scholar

Abstract

This paper considers a two-period model in which a firm needs outside financing in period 2. If a firm establishes a reputation with a bank already in the first period, it may reduce the cost and increase the availability of bank debt in the second period. To establish such a reputation, the firm must induce the bank to monitor in period 1. Bank monitoring effort is non-contractible, so the firm induces the bank to monitor by taking an unsecured bank loan. In period 1 a bank loan may then be preferable to internal finance. This contrasts with a result by Myers and Majluf (1984) where firms always prefer to finance profitable investments internally.