Monitoring Role of Financial Intermediaries and Design of a Market Model for Monitoring Under Market-Based Financing

Abstract

Matching the suppliers and users of funds, financial intermediaries convey information from one to the other and are required to monitor fund-users on behalf of the suppliers. Bank-based financing is dominantly the theoretical arena in researching the monitoring role of financial intermediaries. We claim that market-based financing suffers from the vulnerability of not having a clear mandate for intermediaries to monitor. The indirect mechanisms, namely auditing and rating services, corporate governance principles, disclosure requirements, do not fulfill the informative and monitoring role of the intermediaries in market-based financing though this role is inherently assumed in bank-based financing. To fix this flaw, we tempt to develop a market model for financial intermediaries to monitor fund-raisers under market-based financing.

Keywords: monitoring (screening), finance, intermediaries, market model

JEL Classification: G21, G24, G32