Heterogeneous Multiple Bank Financing: Does it Reduce Inefficient Credit-Renegotiation Incidences?
Financial Markets and Portfolio Management, Vol. 21, No. 4, pp. 445-470, 2007
Posted: 26 Nov 2007
Abstract
Small and medium-sized firms often obtain capital via a mixture of relationship and arm's-length bank lending. We show that such heterogeneous multiple bank financing leads to a lower probability of inefficient credit foreclosure than both monopoly relationship lending and homogeneous multiple bank financing. Yet, in order to reduce hold-up and coordination-failure risk, the relationship bank's fraction of total firm debt must not become too large. For firms with intermediate expected profits, the probability of inefficient credit-renegotiation is shown to decrease along with the relationship bank's information precision. For firms with extremely high or extremely low expected returns, however, it increases.
Keywords: Relationship lending, Asymmetric information, Financial distress, Hold-up, Coordination failure
JEL Classification: D82, G21, L14
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