Implicit Benefits and Financing

39 Pages Posted: 24 May 2019 Last revised: 3 May 2022

See all articles by Franklin Allen

Franklin Allen

Imperial College London

Meijun Qian

Australian National University (ANU) - College of Business and Economics

Jing Xie

Hong Kong Polytechnic University - School of Accounting and Finance

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Date Written: April 28, 2019

Abstract

Social relationship and business connections create implicit benefits between borrowers and lenders. We model how implicit benefits and repayment enforcement costs influence credit allocation, cost, and renegotiation. The optimal solution illustrates that financing with implicit benefits can in many circumstances achieve lower financing costs, higher managerial effort, and better economic outcomes for both the borrower and the lender. This result explains the continuing expansion of alternative financing despite advanced formal financial intermediation, the rise of corporate insider debt, and joint ownership of debt and equity. The growing size and complexity of projects and changes in community relationships explain the expansion of bank financing.

Keywords: Implicit benefits, debt financing, banks, corporate insider debt, joint equity-debt ownership, social and business networks

JEL Classification: G21 G23 D02

Suggested Citation

Allen, Franklin and Qian, Meijun and Xie, Jing, Implicit Benefits and Financing (April 28, 2019). Available at SSRN: https://ssrn.com/abstract=3379442 or http://dx.doi.org/10.2139/ssrn.3379442

Franklin Allen

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Meijun Qian (Contact Author)

Australian National University (ANU) - College of Business and Economics ( email )

Canberra
Australia

Jing Xie

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Hung Hom
Kowloon
Hong Kong

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