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Do banks price their informational monopoly?

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Author Info
Hale, Galina
Santos, João A.C.

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Abstract

Theory suggests that banks' private information lets them hold up borrowers for higher interest rates. Since new information about a firm is revealed at the time of its bond IPO, it follows that banks will be forced to adjust their loan interest rates downwards after firms undertake their bond IPO. We test this hypothesis and find that firms are able to borrow at lower interest rates after their bond IPO. Importantly, firms that get their first credit rating at the time of their bond IPO benefit from larger interest rate savings than those that already had a credit rating. These findings provide support for the hypothesis that banks price their informational monopoly. We also find that it is costly for firms to enter the public bond market.

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Publisher Info
Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 93 (2009)
Issue (Month): 2 (August)
Pages: 185-206
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Handle: RePEc:eee:jfinec:v:93:y:2009:i:2:p:185-206

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Web page: http://www.elsevier.com/locate/inca/505576

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Related research
Keywords: Informational rents Loan spreads Bond IPOs Bond spreads Bank relationships;

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References listed on IDEAS
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.:
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    Other versions:
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Cited by:
(explanations, 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. Galina Hale & Mark M. Spiegel, 2008. "Who drove the boom in euro-denominated bond issues?," Working Paper Series 2008-20, Federal Reserve Bank of San Francisco. [Downloadable!]
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