On the non-exclusivity of loan contracts:an empirical investigation

Degryse, Hans and Ioannidou, Vasso and von Schedvin, Erik (2016) On the non-exclusivity of loan contracts:an empirical investigation. Management Science, 62 (12). pp. 3510-3533. ISSN 0025-1909

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Abstract

We study how a bank’s willingness to lend to a previously exclusive firm changes once the firm obtains a loan from another bank (“outside loan”) and breaks an exclusive relationship. Using a difference-in-difference analysis and a setting where outside loans are observable, we document that an outside loan triggers a decrease in the initial bank’s willingness to lend to the firm i.e., outside loans are strategic substitutes. Consistent with concerns about co-ordination problems and higher indebtedness, we find that this reaction is more pronounced the larger the outside loan and it is muted if the initial bank’s existing and future loans retain seniority and are protected with valuable collateral. Our results give a benevolent role to transparency enabling banks to mitigate adverse effects from outside loans. The resulting substitute behavior may also act as a stabilizing force in credit markets limiting positive co-movements between lenders, decreasing the possibility of credit freezes and financial crises.

Item Type: Journal Article
Journal or Publication Title: Management Science
Uncontrolled Keywords: /dk/atira/pure/subjectarea/asjc/1800/1803
Subjects:
Departments: Lancaster University Management School > Accounting & Finance
ID Code: 74424
Deposited By: ep_importer_pure
Deposited On: 24 Jun 2015 15:24
Refereed?: Yes
Published?: Published
Last Modified: 11 Feb 2020 08:35
URI: https://eprints.lancs.ac.uk/id/eprint/74424

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