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Life-cycle patterns of interest rate markups in small firm finance

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Author Info

  • Moshe Kim

    (University of Haifa and Universitat Pompeu Fabra)

  • Eirik Gaard Kristiansen

    (Norwegian School of Economics and Business Administration)

  • Bent Vale

    ()
    (Norges Bank (Central Bank of Norway))

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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Bibliographic Info

Paper provided by Norges Bank in its series Working Paper with number 2007/04.

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Length: 42 pages
Date of creation: 11 Sep 2007
Date of revision:
Handle: RePEc:bno:worpap:2007_04

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Related research

Keywords: Banking; loan-pricing; lock-in; asymmetric information; competition;

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Cited by:
  1. O. De Jonghe & R. Vander Vennet, 2007. "Competition versus Efficiency: What drives franchise values in European banking?," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 07/491, Ghent University, Faculty of Economics and Business Administration.
  2. 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.
  3. 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.

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