Three essays on the relationship between reputation and leverage: A Bayesian perspective
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[ACCESS RESTRICTED TO THE UNIVERSITY OF MISSOURI AT AUTHOR'S REQUEST.] In markets involving repeated interactions between a principal and an agent, (labor markets, credit market, goods market) agency problems are further compounded by the presence of asymmetric information. Stiglitz and Weiss (1981) suggest that such frictions might help explain why capital may not always flow to firms with profitable investment opportunities. Further, Campbell and Kracaw (1980), Diamond (1984), Fama (1985), Diamond (1991) suggest that such problems may be overcome by the institutional creditors themselves by producing information about these firms and then using this information in their credit decisions. If information is assumed to be durable, not easily transferred and there exits economies of scale in the production of information, then these theories would seem to suggest that firms that maintain close ties with financial institutions should have access to cheaper and more capital. In the words of Petersen and Rajan (1994) such ties represent 'relationships' between the creditors and their debtors. This dissertation explores one such aspect of the debtor-creditor relationship--'borrower reputation' and attempts an estimation of this mechanism on the borrower's ability to take on leverage and the empirical contribution of this mechanism in explaining observed movements in the data.
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