Model In this appendix we present a simple model of the choice between bank loans and bonds. This setting looks at a static choice between two perfectly substitutable sources of funding, subject only to a limit in the availability of the cheaper source. The firm output function is , with and . The firm has no internal funding and has to raise K externally. A firm is borrowing from a bank and from the bond market: L B (1) The bank has an upper limit on the loan it may extend. This is a fixed amount of financing the bank D has, one can think of it as a deposit base which cannot be easily increased: (2) The cost of deposits for the bank is and loans are competitively priced so that the bank charges to the R, R borrower. The bond market supplies bonds in the amount at cost with and . B The firm’s problem is The first order condition with respect to borrowing is: (3) To ensure that the firm utilizes both forms of funding in its optimum, we simply assume that (4) Under assumption (4), constraint (2) is binding, and the firm maximizes the loan it gets, so that . The first order condition with respect to is: B
Model In this appendix we present a simple model of the choice between bank loans and bonds. This setting looks at a static choice between two perfectly substitutable sources of funding, subject only to a limit in the availability of the cheaper source. The firm output function is , with and . The firm has no internal funding and has to raise K externally. A firm is borrowing L from a bank and B from the bond market: (1) The bank has an upper limit D on the loan it may extend. This is a fixed amount of financing the bank has, one can think of it as a deposit base which cannot be easily increased: (2) The cost of deposits for the bank is R, and loans are competitively priced so that the bank charges R to the borrower. The bond market supplies bonds in the amount B at cost with and . The firm’s problem is The first order condition with respect to borrowing is: (3) To ensure that the firm utilizes both forms of funding in its optimum, we simply assume that (4) Under assumption (4), constraint (2) is binding, and the firm maximizes the loan it gets, so that . The first order condition with respect to B is:
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