The Optimal Debt Structure Based On Different Behavior Abilities Between The Bank And The Common Creditors

According to the different abilities of bargaining, monitoring and contest between the bank and the common creditors and from the perspective of moral hazard, the paper study two important theoretical and realistic problems in corporate financing with debt with game analysis technology: The one is how the corporate make the best choice between bank loans and bonds; the other is how to allocate the priority between the bank and the common creditor when the corporate decide to borrow from both of them, i.e. who should be the senior.The paper believes that the difference between the bankruptcy costs and the liquidation costs have influences on the corporate financing decision. The former not only include the latter, but also include the coordination costs among the common creditors. Financing with bonds can deter strategic default due to the bankruptcy threat, but it brings high bankruptcy costs. Therefore, the high quality firms should choose bonds finance; the poor quality firms should choose mixed finance with the bank owning senior and short-term debt, the common creditor only possessing junior and long-term debt. In order to support the arguments that the bankruptcy costs is more expensive than the liquidation costs significantly and the high quality corporate should finance with bonds, the paper study optimal debt structure when the firm's assets are worth more combined than separated. Considering the assets'complementarities, the diffused common creditors can increase their bargaining power. Although the high bargaining power can deter strategic default, it also decreases the asset's liquidation value.The monitoring carried out by the bank result in two problems: lock-in effects and the credible threat of liquidation. The Former is due to that the bank may threatening to liquidate even he knows that the project is good. The latter is due to that the bank have no incentives to liquidate even he knows that the project is bad. The paper analyzes the existence of lock-in effects in bank-borrower relationships due to the bank monitoring with dynamic game method, that is whether so-called bank hold-up exits. When the refinance is locked in to the initial bank for exogenous reasons, Bank hold-up exists if the borrower own less bargaining powers(the bank own more), otherwise it doesn't exists. When the refinance is locked in for endogenous reasons, the hold-up always exists. If bank hold-up exists, the corporate can limit the bank's information rent through allocating the priority to the common creditors. If bank hold-up doesn't exist, bank monitoring brings about another problem, i.e. the credible threat of liquidation. To keep the liquidation threat, bank should have priority in mixed finance.There are two solutions to financial distress: the informal bankruptcy (where creditors have to pay their own lobbying expenses) and the formal bankruptcy (where creditors'legal expenses are paid by the firm). The paper analyzes the contest game between the bank and the common creditors in the informal bankruptcy with contest theory. The analyses show that awarding seniority to banks and making the firm pay the legal expenses can minimize the total contest costs. The conclusion explains why it is reasonable for the court forces the firm to reimburse claimant'fees.