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The Choice between Relationship and Arms Length Debt


Miloš Sprčić, Danijela
The Choice between Relationship and Arms Length Debt // Accounting and Finance in Transition Book Series, Volume 1 / Šević, Željko (ur.).
London: Greenwich University Press, 2004. str. 553-564


Naslov
The Choice between Relationship and Arms Length Debt

Autori
Miloš Sprčić, Danijela

Vrsta, podvrsta i kategorija rada
Poglavlja u knjigama, znanstveni

Knjiga
Accounting and Finance in Transition Book Series, Volume 1

Urednik/ci
Šević, Željko

Izdavač
Greenwich University Press

Grad
London

Godina
2004

Raspon stranica
553-564

ISBN
1-86166-204-1

Ključne riječi
bank loan, corporate bond issue, debt structure, company’s characteristics

Sažetak
One of the most important decisions in corporate finance is a capital structure decision. Financial managers often have to make a choice whether to finance their companies with a debt or equity. The dilemma of capital structure does not end with a debt/equity alternative. It includes a choice among many different kinds of financial instruments and methods. When it comes to the company’s debt structure, one of the most important dilemmas and a subject of many studies is the decision whether a company should be financed with a bank loan or with a public corporate bond issue. This paper presents a comprehensive review of theories and empirical evidence regarding parameters of a “bank loan vs corporate bond” decision. The research is aiming to define advantages and disadvantages of bank loan and corporate bond financing, as well as defining corporate characteristics that have an influence on this “bank loan vs corporate bonds” decision. Results of the literature survey have shown that advantages of a bank loan are as follows: (1) reduction in asymmetric information’s problem through the monitoring function, (2) greater flexibility in determining terms of lending and in changing those terms later on, (3) lower issuing cost, (4) signalling positive information about a credit capacity of a company, (5) lower cost of capital and a longer maturity of a first public bond issue, and (6) a company’s information remains the private property of a bank. Advantages of a bond financing are: (1) lower cost of capital, (2) possibility of raising higher amounts of capital, (3) greater possibility of optimising a debt structure and lowering a refinancing risk through the maturity extension of a debt (4) lower burden of servicing outstanding debt and (5) greater freedom in making financial and investment decisions. The “bank loan vs corporate bond” decision is influenced by characteristics of a specific company, such as: (1) size (2) reputation (3) financial leverage (4) number of creditors and, (5) probability of insolvency. It could be concluded that if a company is small or medium sized, has an asymmetric information problem, a high probability of insolvency, limited needs of raising a capital and it hesitates to go public with its financial information, it will choose a bank loan because the loan meets their financial needs in a more adequate way. On the contrary, bigger companies with a good reputation, greater number of creditors and a lower probability of bankruptcy are financing with a public corporate bond issue, because this instrument has a lower cost of capital, allows greater freedom in making financial and investment decisions and offers greater possibility to optimise company’s debt structure.

Izvorni jezik
Engleski

Znanstvena područja
Ekonomija



POVEZANOST RADA


Ustanove
Ekonomski fakultet, Zagreb

Profili:

Avatar Url Danijela Miloš Sprčić (autor)

Citiraj ovu publikaciju

Miloš Sprčić, Danijela
The Choice between Relationship and Arms Length Debt // Accounting and Finance in Transition Book Series, Volume 1 / Šević, Željko (ur.).
London: Greenwich University Press, 2004. str. 553-564
Miloš Sprčić, D. (2004) The Choice between Relationship and Arms Length Debt. U: Šević, Ž. (ur.) Accounting and Finance in Transition Book Series, Volume 1. London, Greenwich University Press, str. 553-564.
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