LIQUIDATION UNDER MORAL HAZARD - OPTIMAL DEBT MATURITY AND LOAN COMMITMENTS

This paper examines the benefits and limitations of loan commitment fi nancing. Commitments enable firms to adopt more efficient liquidation policies. We demonstrate, however, that the limitations of commitment financing depend on a number of firm characteristics. In some circumst ances, firms find long-term debt to be a superior alternative to commi tment financing. This provides a possible explanation for why loan com mitments are not universally utilized. By considering both the benefit s as well as the limitations of loan commitment financing, we are also able to integrate loan commitment contracts into a model of optimal d ebt maturity.