Life-cycle patterns of interest rate markups in small firm finance
AbstractWe 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 InfoPaper provided by Norges Bank in its series Working Paper with number 2007/04.
Length: 42 pages
Date of creation: 11 Sep 2007
Date of revision:
Banking; loan-pricing; lock-in; asymmetric information; competition;
Other versions of this item:
- Moshe Kim & Eirik Gaard Kristiansen & Bent Vale, 2012. "Life-Cycle Patterns of Interest-Rate Mark-Ups in Small-Firm Finance," Scandinavian Journal of Economics, Wiley Blackwell, vol. 114(2), pages 629-657, 06.
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-03-01 (All new papers)
- NEP-BAN-2008-03-01 (Banking)
- NEP-BEC-2008-03-01 (Business Economics)
- NEP-CFN-2008-03-01 (Corporate Finance)
- NEP-COM-2008-03-01 (Industrial Competition)
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- O. De Jonghe & R. Vander Vennet, 2007.
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Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium
07/491, Ghent University, Faculty of Economics and Business Administration.
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- 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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