Journal of Applied Finance & Banking

Monitoring, Loan Rates and Threat of Enterprise Liquidation in a Bank Relationship

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• Abstract

  This article explores the impact of the choice of the number of banks on the banking monitoring, the cost of credit and the threat of liquidation of the enterprise. According to the literature, the multiple-banking presents a problem of duplication of the monitoring effort of each bank and the sharing of the monitoring revenue. The choice of the number of banks depends on the advantages and disadvantages of the monitoring. The model developed in this paper is a recovery of the Carletti (2004) to which a new hypothesis was added. This is a joint use of banking monitoring and the threat of liquidation of the company to counter the risk of entrepreneur opportunism. The threat of liquidation of the company, in case of failure of the project, can deter the entrepreneur to save his efforts. The results only confirm those of Carletti. Indeed, it is optimal for the company to be financed from a single bank when the amount of the private benefits that the entrepreneur wants to divert is low. Otherwise, the company has interest to be financed from a single bank if the cost of monitoring is weak and vis-à-vis two banks, if not.