Research Discussion Papers, Bank of Finland
Agency Cost of Debt and Lending Market Competition: A Re-Examination
() and Rune Stenbacka
Abstract: We address how lending market competition, measured by
banks’ bargaining power, affects the agency costs of debt finance. We show
that the threshold for obtaining loan finance is independent of the
relative bargaining power of the financier. Moreover, intensified lending
market competition leads to lower lending rates and to investment return
distributions with lower and less risky returns. Hence increased lending
market competition reduces the agency cost of debt financing. Our analysis
does not support the view that there is a tradeoff between more intensive
lending market competition and higher agency costs of debt finance.
Keywords: bank competition; agency cost of debt; (follow links to similar papers)
JEL-Codes: G21; G34; L11; (follow links to similar papers)
23 pages, October 2, 2000
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