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The marked differences between firm characteristics and loan characteristics for the various groups support the hypothesis that firms have differential access to the three markets according to the information problems they pose for lenders. At one end of the scale are small, relatively unknown firms posing significant information problems that require extensive due diligence or loan monitoring by lenders. These firms tend to have access only to relatively short-term loans provided by banks and other bank-like intermediaries, which have the staff and expertise to undertake informationintensive lending and which limit borrowers' risk-taking through tight covenants or collateral in loan agreements.

Somewhat less information-problematic, typically larger borrowers can issue in the private placement market. These borrowers must still be served by an information-intensive lender, but they pose fewer problems than the average bank borrower. They can issue longer-term debt with somewhat looser covenants than those in bank loans.

Finally, well-known, typically larger firms that are not information problematic and that have straightforward financings can issue in the public debt markets, where lenders perform little due diligence and loan monitoring and where covenants are relatively few in number and loose in nature.

The reasons for this equilibrium pattern of borrower characteristics are discussed in part 1, section 5. The pattern is evidence that the various debt markets are imperfect substitutes for one another, which implies that breakdowns or failures in one market may have material effects on firms that rely on that market for a major part of their financing needs, even if other markets are functioning normally. An example of such a breakdown is discussed in part 3, section 1.

Lenders in the Private Placement Market

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