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Does Corporate Lending by Banks and Finance Companies Differ? Evidence on Specialization in Private Debt Contracting

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  • Mark Carey

    (Federal Reserve Board,)

  • Mitch Post

    (Investment Company Institute)

  • Steven A. Sharpe

    (Federal Reserve Board,)

Abstract

This paper establishes empirically the existence of specialization in private-market corporate lending, adding a new dimension to the public versus private debt distinctions now common in the literature. Comparing corporate loans made by banks and by finance companies, we find that the two types of intermediaries are equally likely to finance information-problematic firms. However, finance companies tend to serve observably riskier borrowers, particularly more leveraged borrowers. Evidence supports both regulatory and reputation-based explanations for this specialization. In passing, we shed light on various theories of debt contracting and intermediation and present facts about finance companies. Copyright The American Finance Association 1998.

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Bibliographic Info

Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 53 (1998)
Issue (Month): 3 (06)
Pages: 845-878

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Handle: RePEc:bla:jfinan:v:53:y:1998:i:3:p:845-878

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References

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  1. Jeffrey K. MacKie-Mason, 1989. "Do Firms Care Who Provides their Financing?," NBER Working Papers 3039, National Bureau of Economic Research, Inc.
  2. Steven A. Sharpe & Hien H. Nguyen, 1994. "Capital market imperfections and the incentive to lease," Finance and Economics Discussion Series 94-5, Board of Governors of the Federal Reserve System (U.S.).
  3. Berger, Allen N & Udell, Gregory F, 1995. "Relationship Lending and Lines of Credit in Small Firm Finance," The Journal of Business, University of Chicago Press, vol. 68(3), pages 351-81, July.
  4. Donald G. Simonson, 1994. "Business Strategies: Bank Commercial Lending vs. Finance Company Lending," Economics Working Paper Archive wp_112, Levy Economics Institute.
  5. Kahan, Marcel & Tuckman, Bruce, 1993. "Private vs. Public Lending: Evidence from Covenants," University of California at Los Angeles, Anderson Graduate School of Management qt1xw4w7sk, Anderson Graduate School of Management, UCLA.
  6. Black, Fischer, 1975. "Bank funds management in an efficient market," Journal of Financial Economics, Elsevier, vol. 2(4), pages 323-339, December.
  7. Steven M. Fazzari & R. Glenn Hubbard & BRUCE C. PETERSEN, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
  8. Boot, Arnoud W A & Thakor, Anjan V & Udell, Gregory F, 1991. "Secured Lending and Default Risk: Equilibrium Analysis, Policy Implications and Empirical Results," Economic Journal, Royal Economic Society, vol. 101(406), pages 458-72, May.
  9. Eli M. Remolona & Kurt C. Wulfekuhler, 1992. "Finance companies, bank competition, and niche markets," Quarterly Review, Federal Reserve Bank of New York, issue Sum, pages 25-38.
  10. Smith, Clifford Jr. & Warner, Jerold B., 1979. "On financial contracting : An analysis of bond covenants," Journal of Financial Economics, Elsevier, vol. 7(2), pages 117-161, June.
  11. Dimitri B. Papadimitriou & Ronnie J. Phillips & L. Randall Wray, . "An Alternative in Small Business Finance, Community-Based Factoring Companies and Small Business Lending," Economics Public Policy Brief Archive 12, Levy Economics Institute.
  12. Allen N. Berger & Gregory F. Udell, 1988. "Collateral, loan quality, and bank risk," Finance and Economics Discussion Series 51, Board of Governors of the Federal Reserve System (U.S.).
  13. Simon H. Kwan & Willard T. Carleton, 1995. "The role of private placement debt issues in corporate finance," Working Papers in Applied Economic Theory 95-13, Federal Reserve Bank of San Francisco.
  14. Leonard I. Nakamura, 1991. "Commercial bank information: implications for the structure of banking," Working Papers 92-1, Federal Reserve Bank of Philadelphia.
  15. Stulz, ReneM. & Johnson, Herb, 1985. "An analysis of secured debt," Journal of Financial Economics, Elsevier, vol. 14(4), pages 501-521, December.
  16. Charles Calomiris & Mark Carey, 1994. "Loan market competition between foreign and U.S. banks: some facts about loans and borrowers," Proceedings 38, Federal Reserve Bank of Chicago.
  17. Chemmanur, Thomas J & Fulghieri, Paolo, 1994. "Reputation, Renegotiation, and the Choice between Bank Loans and Publicly Traded Debt," Review of Financial Studies, Society for Financial Studies, vol. 7(3), pages 475-506.
  18. Diamond, Douglas W, 1991. "Monitoring and Reputation: The Choice between Bank Loans and Directly Placed Debt," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 689-721, August.
  19. Mitchell Berlin & Loretta J. Mester, 1992. "Debt covenants and renegotiation," Working Papers 92-9, Federal Reserve Bank of Philadelphia.
  20. Flannery, Mark J., 1989. "Capital regulation and insured banks choice of individual loan default risks," Journal of Monetary Economics, Elsevier, vol. 24(2), pages 235-258, September.
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