SFB 303 Discussion Paper No. A - 583
Author: Schuhmacher, Joachim
Title: Seniority Structure and Financial Intermediation
Abstract: The financial structure of firms is diverse. Firms
issue many different types of financial claims. This article
focuses on the seniority structure of debt contracts. It is
outlined under what conditions firms can improve the outcome of their
financial decisions by choosing seniority structure. The main reason
for issuing debt contracts with different priority is that in case of
financial distress firms only have to renegotiate with a smaller number
of creditors. This outcome makes observation of the firm`s
condition by creditors more likely. If observation
occurs seniority decreases observation costs. But observation
can also harm the owner so that seniority could be inferior
to a debt structure which treats all creditors identically.
Later on we introduce a financial intermediary into the model.
It is outlined how a financial intermediary can be welfare improving
on the junior level.
Keywords: Seniority Structure, Financial Intermediation, Asymmetric Information.
JEL-Classification-Number: D82, G21, G32, G33
Creation-Date: October 1998
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