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The Sources of Debt Matter Too

Published online by Cambridge University Press:  06 April 2009

Yang Liu
Yang Liu
Affiliation:
yliu@calpoly.edu, California Polytechnic State University, Orfalea College of Business, Department of Finance, San Luis Obispo, CA 93407.
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Abstract

This paper examines the effects of different types of private debt on firm cash balances, equity risk, and investment. Firms with more bank loans have more cash and investment, but lower equity risk. Firms with more nonbank private debt have more cash, lower equity risk, and less investment. Firms with more unused credit lines have less cash and lower equity risk, but greater investment. Results suggest that financial intermediaries' monitoring intensity increases with loan size. Depending on type, private debt mitigates information asymmetry or asset substitution, or both. Deposit relations associated with bank borrowing also contribute to banks' information advantage.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 41 , Issue 2 , June 2006 , pp. 295 - 316
Copyright
Copyright © School of Business Administration, University of Washington 2006

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