A Theory of Corporate Capital Structure and Investment

This article uses a general equilibrium framework to explorethe origins and limitations of financial intermediaries. Inthe model, investors have a generic lending technology thatthey can improve at a cost. Those who upgrade become intermediariesto exploit their advantage. However, conflicts with depositorswill limit the banks' market presence, and they will only lendto moderately endowed firms while bondholders will finance cash-richcorporations. The article also analyzes the extent to whichinvestors adopt the superior lending technique, the nature ofbank competition, and how corporate and bank conditions affectinterest rates and investment.     

How do firms choose their lenders? An empirical investigation

This article investigates which companies finance themselvesthrough intermediaries and which borrow directly from arm'slength investors. Our empirical results show that large companieswith abundant cash and collateral tap credit markets directly;these markets cater to safe and profitable industries, and aremost active when riskless rates or intermediary earnings arelow. We show that determinants of lender selection sharpen duringinvestment downturns and that there are substantial asymmetriesin the way firms enter and exit capital markets. These resultssupport a theoretical framework where intermediaries have betterreorganizational skills but a higher opportunity cost of capitalthan bondholders.