Bank Loans and Corporate Debt Ownership: Some Evidence from an Economy in Transition‪.‬

INTRODUCTION Theoretical and empirical work in finance indicates that firms weigh the costs and benefits of private debt financing, and arrive at an optimal mix of private ("inside") and public ("arms-length") debt (e.g., Rajan, 1992; Diamond, 1993; Houston & James, 1996; Johnson, 1997a). In particular, the evidence suggests that, among other factors, the degree of information asymmetry and monitoring need exhibited by a firm affects the relative weights of the two types of debt in the firm's financing structure, since private debt tends to mitigate the adverse selection and moral hazard problems that accompany external financing.