Liquidity, Pledgeability, and the Nature of Lending

60 Pages Posted: 25 Jan 2021

See all articles by Douglas W. Diamond

Douglas W. Diamond

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Yunzhi Hu

University of North Carolina (UNC) at Chapel Hill - Finance Area

Raghuram G. Rajan

University of Chicago - Booth School of Business; International Monetary Fund (IMF); National Bureau of Economic Research (NBER)

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Date Written: January 25, 2021

Abstract

We develop a theory of how corporate lending and financial intermediation change based on the fundamentals of the firm and its environment. We focus on the interaction between the prospective net worth or liquidity of an industry and the firm’s internal governance or pledgeability. Variations in prospective liquidity can induce changes in the nature, covenants, and quantity of loans that are made, the identity of the lender, and the extent to which the lender is leveraged. We offer predictions on how these might vary over the financial cycle.

Keywords: liquidity, pledgeability, financial cycle, monitoring, loans, performance-pricing debt, intermediary capital

Suggested Citation

Diamond, Douglas W. and Hu, Yunzhi and Rajan, Raghuram G., Liquidity, Pledgeability, and the Nature of Lending (January 25, 2021). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2021-09, Available at SSRN: https://ssrn.com/abstract=3773076 or http://dx.doi.org/10.2139/ssrn.3773076

Douglas W. Diamond

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
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773-702-7283 (Phone)

HOME PAGE: http://faculty.chicagobooth.edu/douglas.diamond/

National Bureau of Economic Research (NBER)

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Yunzhi Hu

University of North Carolina (UNC) at Chapel Hill - Finance Area ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

Raghuram G. Rajan (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-4437 (Phone)
773-702-0458 (Fax)

International Monetary Fund (IMF) ( email )

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United States

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States
773-702-9299 (Phone)
773-702-0458 (Fax)

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