The effect of bank debt on optimal capital structure

I examine the relation between leverage and bank debt use to analyze the effects of bank screening and monitoring on capital structure. The analysis joins capital structure models in which asymmetric-information problems reduce optimal leverage with recent banking firm models in which screening and monitoring mitigate these problems. I find a positive relation between leverage and the use of bank debt, which is robust to controlling for other determinants of leverage. The relation appears to be created partly by bank debt use attenuating potential asset-substitution problems. The results imply that the choice of debt source is an important element of the capital structure decision.