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Does corporate lending by banks and finance companies differ? Evidence on specialization in private debt contracting

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  • Mark Carey
  • Mitch Post
  • Steven A. Sharpe

Abstract

This paper establishes empirically that specialization in private-market corporate lending exists, adding a new dimension to the public vs. private debt distinctions now common in the literature on debt contracting and financial intermediation. Using a large database of individual loans, we compare lending by finance companies to that by banks. The evidence implies that it is intermediaries in general that are special in solving information problems, not banks in particular. But lending by the two types of institutions is not identical. Finance companies tend to serve observably riskier borrowers, especially highly leveraged borrowers, although banks and finance companies do compete across the spectrum of borrower risk. The evidence supports both regulatory and reputational explanations for this specialization and perhaps an explanation based on institutional differences in borrower monitoring and control. In passing, we shed light on various theories of debt contracting and intermediation and also present facts about finance companies, which have received little attention.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 96-25.

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Date of creation: 1996
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Handle: RePEc:fip:fedgfe:96-25

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Keywords: Bank loans ; Debt;

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References

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  1. Mitchell Berlin & Loretta J. Mester, 1990. "Debt covenants and renegotiation," Working Papers 90-21, Federal Reserve Bank of Philadelphia.
  2. Steven Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1987. "Financing Constraints and Corporate Investment," NBER Working Papers 2387, National Bureau of Economic Research, Inc.
  3. Allen N. Berger & Gregory F. Udell, 1988. "Collateral, loan quality, and bank risk," Finance and Economics Discussion Series 51, Board of Governors of the Federal Reserve System (U.S.).
  4. Jeffrey K. MacKie-Mason, 1989. "Do Firms Care Who Provides their Financing?," NBER Working Papers 3039, National Bureau of Economic Research, Inc.
  5. 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.
  6. 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.
  7. Black, Fischer, 1975. "Bank funds management in an efficient market," Journal of Financial Economics, Elsevier, vol. 2(4), pages 323-339, December.
  8. Berger, Allen N & Udell, Gregory F, 1995. "Relationship Lending and Lines of Credit in Small Firm Finance," The Journal of Business, University of Chicago Press, vol. 68(3), pages 351-81, July.
  9. Steven A. Sharpe & Hien H. Nguyen, 1994. "Capital market imperfections and the incentive to lease," Finance and Economics Discussion Series 94-5, Board of Governors of the Federal Reserve System (U.S.).
  10. Chemmanur, Thomas J & Fulghieri, Paolo, 1994. "Reputation, Renegotiation, and the Choice between Bank Loans and Publicly Traded Debt," Review of Financial Studies, Society for Financial Studies, vol. 7(3), pages 475-506.
  11. 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.
  12. Flannery, Mark J., 1989. "Capital regulation and insured banks choice of individual loan default risks," Journal of Monetary Economics, Elsevier, vol. 24(2), pages 235-258, September.
  13. 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.
  14. 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.
  15. Leonard I. Nakamura, 1991. "Commercial bank information: implications for the structure of banking," Working Papers 92-1, Federal Reserve Bank of Philadelphia.
  16. Donald G. Simonson, 1994. "Business Strategies: Bank Commercial Lending vs. Finance Company Lending," Economics Working Paper Archive wp_112, Levy Economics Institute.
  17. 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.
  18. Stulz, ReneM. & Johnson, Herb, 1985. "An analysis of secured debt," Journal of Financial Economics, Elsevier, vol. 14(4), pages 501-521, December.
  19. Kahan, Marcel & Tuckman, Bruce, 1993. "Private vs. Public Lending: Evidence from Covenants," University of California at Los Angeles, Anderson Graduate School of Management qt1xw4w7sk, Anderson Graduate School of Management, UCLA.
  20. Charles Calomiris & Mark Carey, 1994. "Loan market competition between foreign and U.S. banks: some facts about loans and borrowers," Proceedings 38, Federal Reserve Bank of Chicago.
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