Institutional Liquidity Needs and the Structure of Monitored Finance

40 Pages Posted: 27 Dec 2000

See all articles by Andrew Winton

Andrew Winton

University of Minnesota - Twin Cities - Carlson School of Management; Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF)

Multiple version iconThere are 2 versions of this paper

Date Written: November 2000

Abstract

Many financial institutions finance and monitor firms on behalf of other investors. Since monitoring gives an institution private information about its assets, the institution faces an adverse selection problem when it seeks additional funds from other investors to meet its liquidity needs; in equilibrium, some of these needs go unmet, creating liquidity costs. Liquidity costs increase with the risk of the institution's claims on the firms it monitors, so all else equal the institution can reduce its liquidity costs by holding debt rather than equity. This preference for debt should be most significant for institutions that finance firms with limited access to public markets. Among these institutions, those with less frequent or less severe liquidity needs should have a greater relative appetite for equity and for the debt of more risky borrowers. These predictions are consistent with general patterns of monitored finance and with differences across institutions.

Keywords: liquidity, financial institutions, delegated monitoring

JEL Classification: G20, G21, G22, G24, G32

Suggested Citation

Winton, Andrew, Institutional Liquidity Needs and the Structure of Monitored Finance (November 2000). Available at SSRN: https://ssrn.com/abstract=253163 or http://dx.doi.org/10.2139/ssrn.253163

Andrew Winton (Contact Author)

University of Minnesota - Twin Cities - Carlson School of Management ( email )

321 19th Avenue South
Department of Finance
Minneapolis, MN 55455
United States
612-624-0589 (Phone)
612-626-1335 (Fax)

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

Register to save articles to
your library

Register

Paper statistics

Downloads
192
rank
155,024
Abstract Views
1,486
PlumX Metrics
!

Under construction: SSRN citations will be offline until July when we will launch a brand new and improved citations service, check here for more details.

For more information