Should banks own equity stakes in their borrowers? A contractual solution to hold-up problems

@article{MahrtSmith2006ShouldBO,
  title={Should banks own equity stakes in their borrowers? A contractual solution to hold-up problems},
  author={Jan Mahrt-Smith},
  journal={Journal of Banking and Finance},
  year={2006},
  volume={30},
  pages={2911-2929}
}
  • Jan Mahrt-Smith
  • Published 2006
  • Economics
  • Journal of Banking and Finance
  • Abstract This paper develops a model to answer the question whether a bank should hold a share of the equity of a borrowing firm. The model shows that a small equity stake held by the bank can have a significant and positive impact on the lending relationship. The benefit of bank equity participation arises from the reduced ability of the bank to extract rents from the firm in multiple rounds of financing. This, in turn, improves the firm’s incentive to make investments in profitable projects… CONTINUE READING
    38 Citations

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