Agency Cost of Debt and Lending Market Competition: A Re-Examination
Bank of Finland Discussion Paper No. 12/2000
23 Pages Posted: 25 Jun 2002
Date Written: February 10, 2000
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
JEL Classification: G21, G34, L11
Suggested Citation: Suggested Citation