• Financial Intermediation and Firms’ Financing Choices under Double Information Imperfection

Abstract

This paper proposes a model to analyze the optimal financing choices for firms in a structure that has imperfect information on both the firm’s type and the state of the industry. Assuming that intermediaries start with the production of information that is to their relative advantage, it is discovered that firms with mid-level quality attempt to access commercial bank lending while those with relatively high or low quality levels tend to pursue capital market financing. Moreover, the market share secured by each type of financing may expand or shrink as industry prospects change, depending on the industry’s initial prospects. Finally, each intermediary is allowed to decide on its optimal sequencing of information production and the impact of sequencing on the intermediary’s competitive status for serving the firm’s financing needs is examined.

Keywords: Financial Intermediary, Imperfect Information, Financing Choice