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Heterogeneous Multiple Bank Financing Under Uncertainty: Does it Reduce Inefficient Credit Decisions?

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Christina E. Bannier ()

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Abstract

Small and medium-sized firms often obtain capital via a mixture of relationship and arm's-length bank lending. This paper explores the reasons for the dominance of such heterogeneous multiple bank financing. We show that the incidence of inefficient credit termination decreases in the relationship bank's information precision for firms with low expected cash-flows, but increases for firms with high expected profits. Generally, however, heterogeneous multiple bank financing leads to fewer inefficient credit decisions than both monopoly relationship lending and homogeneous multiple bank financing, provided that the relationship bank's fraction of total firm debt is not too large.

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Paper provided by Department of Finance, Goethe University Frankfurt am Main in its series Working Paper Series: Finance and Accounting with number 149.

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Date of creation: Mar 2005
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Handle: RePEc:fra:franaf:149

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Find related papers by JEL classification:
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information

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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.:
  1. Franz Hubert & Dorothea Schäfer, 2002. "Coordination Failure with Multiple-Source Lending, the Cost of Protection Against a Powerful Lender," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 158(2), pages 256-, June.
  2. D'Auria, Claudio & Foglia, Antonella & Reedtz, Paolo Marullo, 1999. "Bank interest rates and credit relationships in Italy," Journal of Banking & Finance, Elsevier, vol. 23(7), pages 1067-1093, July. [Downloadable!] (restricted)
  3. Foglia, A. & Laviola, S. & Marullo Reedtz, P., 1998. "Multiple banking relationships and the fragility of corporate borrowers," Journal of Banking & Finance, Elsevier, vol. 22(10-11), pages 1441-1456, October. [Downloadable!] (restricted)
  4. Ralf Elsas & Frank Heinemann & Marcel Tyrell, 2004. "Multiple but Asymmetric Bank Financing: The Case of Relationship Lending," Working Paper Series: Finance and Accounting 141, Department of Finance, Goethe University Frankfurt am Main. [Downloadable!]
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  5. Ongena, Steven & Smith, David C., 2000. "What Determines the Number of Bank Relationships? Cross-Country Evidence," Journal of Financial Intermediation, Elsevier, vol. 9(1), pages 26-56, January. [Downloadable!] (restricted)
  6. Stephen Morris & Hyun S Shin, 2001. "Global Games: Theory and Applications," Levine's Working Paper Archive 122247000000001080, UCLA Department of Economics. [Downloadable!]
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  7. Enrica Detragiache & Paolo Garella & Luigi Guiso, 2000. "Multiple versus Single Banking Relationships: Theory and Evidence," Journal of Finance, American Finance Association, vol. 55(3), pages 1133-1161, 06. [Downloadable!] (restricted)
  8. Elsas, Ralf & Krahnen, Jan Pieter, 1998. "Is relationship lending special? Evidence from credit-file data in Germany," Journal of Banking & Finance, Elsevier, vol. 22(10-11), pages 1283-1316, October. [Downloadable!] (restricted)
  9. Bolton, Patrick & Scharfstein, David S, 1996. "Optimal Debt Structure and the Number of Creditors," Journal of Political Economy, University of Chicago Press, vol. 104(1), pages 1-25, February. [Downloadable!] (restricted)
  10. Dewatripont, M & Maskin, E, 1995. "Credit and Efficiency in Centralized and Decentralized Economies," Review of Economic Studies, Blackwell Publishing, vol. 62(4), pages 541-55, October. [Downloadable!] (restricted)
  11. Brunner, Antje & Krahnen, Jan Pieter, 2004. "Multiple Lenders and Corporate Distress: Evidence on Debt Restructuring," CEPR Discussion Papers 4287, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  12. Rajan, Raghuram G, 1992. " Insiders and Outsiders: The Choice between Informed and Arm's-Length Debt," Journal of Finance, American Finance Association, vol. 47(4), pages 1367-400, September. [Downloadable!] (restricted)
  13. Morris, Stephen & Shin, Hyun Song, 2004. "Coordination risk and the price of debt," European Economic Review, Elsevier, vol. 48(1), pages 133-153, February. [Downloadable!] (restricted)
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  14. Carlsson, H. & Van Damme, E., 1990. "Global Games And Equilibrium Selection," Papers 9052, Tilburg - Center for Economic Research.
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  1. Ongena, Steven & Tümer-Alkan, Günseli & Westernhagen, Natalja von, 2007. "Creditor concentration: an empirical investigation," Discussion Paper Series 2: Banking and Financial Studies 2007,15, Deutsche Bundesbank, Research Centre. [Downloadable!]
  2. Christophe J. Godlewski & Ydriss Ziane, 2008. "How many banks does it take to lend? Empirical evidence from Europe," Working Papers of LaRGE (Laboratoire de Recherche en Gestion et Economie) 2008-11, Laboratoire de Recherche en Gestion et Economie, Université Louis Pasteur, Strasbourg (France). [Downloadable!]
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