Corporate Financial Policy and the Theory of Financial Intermediation



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    • Amos Tuck School of Business Administration, Dartmouth College. This paper is based on several chapters of my Ph.D. dissertation at the University of Wisconsin at Madison. I wish to thank my advisor, Lemma Senbet, and committee members Ramasastry Ambarish, Mark Gertler, Donald Hausch, and David Mauer for many valuable discussions and comments. Comments on earlier versions of the paper by Anjan Thakor, various faculty members of the Amos Tuck School, René Stulz (the editor), and an anonymous referee are gratefully acknowledged. I alone bear the responsibility of any remaining errors.


This paper examines the optimal structure of financial contracts in an economy subject to two forms of moral hazard. Multiple information problems are shown to generate a role for multiple classes of financial claimants. We then show that economic efficiency is enhanced if the financial structure of the economy consists of both direct and intermediated financial contract markets. Consequently, our results demonstrate a motivation for the complementarity between capital markets and depository financial institutions.