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

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Author Info
Mark Carey (Federal Reserve Board,)
Mitch Post (Investment Company Institute)
Steven A. Sharpe (Federal Reserve Board,)

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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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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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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. 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. [Downloadable!] (restricted)
  2. 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.
  3. 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.
  4. Chemmanur, Thomas J & Fulghieri, Paolo, 1994. "Reputation, Renegotiation, and the Choice between Bank Loans and Publicly Traded Debt," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 7(3), pages 475-506. [Downloadable!] (restricted)
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  5. Leonard I. Nakamura, 1991. "Commercial bank information: implications for the structure of banking," Working Papers 92-1, Federal Reserve Bank of Philadelphia.
  6. Stulz, ReneM. & Johnson, Herb, 1985. "An analysis of secured debt," Journal of Financial Economics, Elsevier, vol. 14(4), pages 501-521, December. [Downloadable!] (restricted)
  7. 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. [Downloadable!] (restricted)
  8. Berger, Allen N & Udell, Gregory F, 1995. "Relationship Lending and Lines of Credit in Small Firm Finance," Journal of Business, University of Chicago Press, vol. 68(3), pages 351-81, July. [Downloadable!] (restricted)
  9. Steven Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," NBER Working Papers 2387, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Berlin, Mitchell & Mester, Loretta J., 1992. "Debt covenants and renegotiation," Journal of Financial Intermediation, Elsevier, vol. 2(2), pages 95-133, June. [Downloadable!] (restricted)
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  11. Marcel Kahan & Bruce Tuckman, 1993. "Private vs. Public Lending: Evidence from Covenants," University of California at Los Angeles, Anderson Graduate School of Management 1152, Anderson Graduate School of Management, UCLA. [Downloadable!]
  12. Sharpe, Steven A. & Nguyen, Hien H., 1995. "Capital market imperfections and the incentive to lease," Journal of Financial Economics, Elsevier, vol. 39(2-3), pages 271-294. [Downloadable!] (restricted)
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  13. Black, Fischer, 1975. "Bank funds management in an efficient market," Journal of Financial Economics, Elsevier, vol. 2(4), pages 323-339, December. [Downloadable!] (restricted)
  14. 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, The. [Downloadable!]
  15. 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. [Downloadable!] (restricted)
  16. Berger, Allen N. & Udell, Gregory F., 1990. "Collateral, loan quality and bank risk," Journal of Monetary Economics, Elsevier, vol. 25(1), pages 21-42, January. [Downloadable!] (restricted)
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