In particular the information the fi generates

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Unformatted text preview: wer. In particular, the information the FI generates regarding the firm is frequently updated as 2 For a theoretical modeling of the delegated monitor function, see D. W. Diamond, “Financial Intermediaries and Delegated Monitoring,” Review of Economic Studies 51 (1984), pp. 393–414; J. H. Boyd and E. C. Prescott, “Financial Intermediary—Coalitions,” Journal of Economic Theory 38 (1986), pp. 211–32; and A. Winton, “Competition among Financial Intermediaries When Diversification Matters,” Journal of Financial Intermediation 6 (1997), pp. 307–46. sau86198_ch01.qxd 4/21/02 8:52 PM Page 7 Chapter 1 Why Are Financial Intermediaries Special? 7 its loan renewal decisions are made. When bank loan contracts are sufficiently short term, the banker becomes almost like an insider to the firm regarding informational familiarity with its operations and financial conditions. Indeed, this more frequent monitoring often replaces the need for the relatively inflexible and hard-to-enforce covenant...
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