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RFS Advance Access originally published online on October 15, 2003
Review of Financial Studies 2004 17(4):1103-1128; doi:10.1093/rfs/hhg045
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The Review of Financial Studies Vol. 17, No. 4 © 2004 The Society for Financial Studies; all rights reserved.

A Theory of Corporate Capital Structure and Investment

Miguel Cantillo
Universidad de Costa Rica

Address correspondence to Miguel Cantillo, Instituto de Investigaciones Económicas, Universidad de Costa Rica, Apdo. 66-2250 Costa Rica, or e-mail: cantillo{at}stanfordalumni.org

This article uses a general equilibrium framework to explore the origins and limitations of financial intermediaries. In the model, investors have a generic lending technology that they can improve at a cost. Those who upgrade become intermediaries to exploit their advantage. However, conflicts with depositors will limit the banks' market presence, and they will only lend to moderately endowed firms while bondholders will finance cash-rich corporations. The article also analyzes the extent to which investors adopt the superior lending technique, the nature of bank competition, and how corporate and bank conditions affect interest rates and investment.


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