Complementary between Bank Debt and Bond Debt: Interpretation in Terms of Signals

Résumé 0

In this work, we show how complementary bank debt and bond debt are. Banks distinguish themselves from the bond market in the sense that they are the best evaluators of firms’ riskiness. Due to market power, bank rates are therefore uninformative and also more expensive than bond rates. In a context of adverse selection, firms can signal their quality to the bond market by using the size of bank debt. We show within this framework that the less risky the firm is, the larger the part of bank debt in its whole financing. Then, we study the trade-off between the previous signalling equilibrium (using both bank debt and bond debt) and an exclusive bond issue with fixed costs. We show that the exclusive bond issue is used by both the firms of best qualities and worst qualities: the first type wishing cheaper financing and the second type being reluctant to signal its quality. The firms of medium qualities prefer to negotiate mixed financing (bank debt and a bond issue).