Bank Financing and Investment Decisions with Asymmetric Information / Deborah Lucas, Robert L. McDonald.

Format:

Book

Author/Creator:

Lucas, Deborah.

Contributor:

National Bureau of Economic Research.

McDonald, Robert L.

Series:

Working Paper Series (National Bureau of Economic Research) no. w2422.

NBER working paper series no. w2422

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1987.

Summary:

Banks know more about the quality of their assets than do outside investors. This informational asymmetry can distort investment decisions if the bank must raise funds from uninformed outsiders, and assets sold will be subject to a lemons discount. Using a three-period equilibrium model we examine the effect of asymmetric information about loan quality on the asset and liability decisions of banks and the market valuation of bank liabilities. The existence of a precautionary demand for T-bills against future liquidity needs depends both on the regulatory environment and the informational structure. If banks are ex ante identical, issuing risky debt to fund a deposit outflow is preferred to holding T-bills ex ante. However, if banks have partial knowledge of loan quality, and if their asset choice is observable, they may hold T-bills to signal their quality, enabling them to issue risky debt at a lower interest rate.

Notes:

Print version record

October 1987.