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Life-Cycle Patterns of Interest-Rate Mark-Ups in Small-Firm Finance

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  • Moshe Kim
  • Eirik Gaard Kristiansen
  • Bent Vale

Abstract

We derive empirical implications from a stylized theoretical model of bankborrower relationships. Banks’ interest rate markups are predicted to follow a life-cycle pattern over the borrowing firms’ age. Due to endogenous bank monitoring by competing banks, borrowing firms initially face a low markup, thereafter an increasing markup due to informatonal lock-in until it falls for older firms when lock-in is resolved. By applying a large sample of small unlisted firms and a new measure of asymmetric information, we find that firms with significant asymmetric information problems have a more pronounced life-cycle pattern of interest rate markups. Additionally, we examine the effects of concentrated banking markets on interest markups. Results indicate that markups are mainly driven by asymmetric information problems and not by concentration. However, we find weak evidence that bank market concentration matters for old firms.

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File URL: http://hdl.handle.net/10.1111/j.1467-9442.2011.01688.x
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Bibliographic Info

Article provided by Wiley Blackwell in its journal Scandinavian Journal of Economics.

Volume (Year): 114 (2012)
Issue (Month): 2 (06)
Pages: 629-657

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Handle: RePEc:bla:scandj:v:114:y:2012:i:2:p:629-657

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Web page: http://onlinelibrary.wiley.com/journal/10.1111/(ISSN)1467-9442

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Cited by:
  1. De Jonghe, Olivier & Vennet, Rudi Vander, 2008. "Competition versus efficiency: What drives franchise values in European banking?," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1820-1835, September.
  2. Hetland, Ove Rein & Mjøs, Aksel, 2011. "Using Bank Mergers and Acquisitions to Understand Lending Relationships," Discussion Papers 2011/13, Department of Business and Management Science, Norwegian School of Economics.
  3. Diana Bonfim & Qinglei Dai & Francesco Franco, 2009. "The Number of Bank Relationships, Borrowing Costs and Bank Competition," Working Papers w200912, Banco de Portugal, Economics and Research Department.

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