Abstract
This paper determines when a debt contract will be monitored by lenders. This is the choice between borrowing directly (issuing a bond, without monitoring) and borrowing through a bank that monitors to alleviate moral hazard. This provides a theory of bank loan demand and of the role of monitoring in circumstances in which reputation effects are important. A key result is that borrowers with credit ratings toward the middle of the spectrum rely on bank loans, and in periods of high interest rates or low future profitability, higher-rated borrowers choose to borrow from banks.
Keywords
Moral hazardDebtReputationLoanProfitability indexBusinessInterest rateBondMonetary economicsFinancial systemCost of funds indexFinanceEconomicsMicroeconomicsIncentive
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Publication Info
- Year
- 1991
- Type
- article
- Volume
- 99
- Issue
- 4
- Pages
- 689-721
- Citations
- 3327
- Access
- Closed
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Cite This
Douglas W. Diamond
(1991).
Monitoring and Reputation: The Choice between Bank Loans and Directly Placed Debt.
Journal of Political Economy
, 99
(4)
, 689-721.
https://doi.org/10.1086/261775
Identifiers
- DOI
- 10.1086/261775