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The Effect of Credit Market Competition on Lending Relationships

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  • Mitchell A. Petersen
  • Raghuram G. Rajan

Abstract

This paper provides a simple model showing that the extent of competition in credit markets is important in determining the value of lending relationships. Creditors are more likely to finance credit constrained firms when credit markets are concentrated because it is easier for these creditors to internalize the benefits of assisting the firms. The model has implications about the availability and the price of credit as firms age in different markets. The paper offers evidence for these implications from small business data. It concludes with conjectures on the costs and benefits of liberalizing financial markets, as well as the timing of such reforms.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4921.

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Date of creation: Nov 1994
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Publication status: published as Quarterly Journal of Economics, May 1995, pp. 407-443.
Handle: RePEc:nbr:nberwo:4921

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  1. Mathias Dewatripont & Jean Tirole, 1994. "A theory of debt and equity: diversity of securities and manager-shareholder congruence," ULB Institutional Repository 2013/9593, ULB -- Universite Libre de Bruxelles.
  2. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, Elsevier, vol. 5(2), pages 147-175, November.
  3. Gertler, Mark, 1990. "Financial Capacity And Output Fluctuations In An Economy With Multiperiod Financial Relationships," Working Papers, C.V. Starr Center for Applied Economics, New York University 90-44, C.V. Starr Center for Applied Economics, New York University.
  4. Petersen, Mitchell A & Rajan, Raghuram G, 1994. " The Benefits of Lending Relationships: Evidence from Small Business Data," Journal of Finance, American Finance Association, American Finance Association, vol. 49(1), pages 3-37, March.
  5. Takeo Hoshi & Anil Kashyap & David Scharfstein, 1990. "Bank Monitoring and Investment: Evidence from the Changing Structure of Japanese Corporate Banking Relationships," NBER Chapters, in: Asymmetric Information, Corporate Finance, and Investment, pages 105-126 National Bureau of Economic Research, Inc.
  6. Mian, Shehzad L & Smith, Clifford W, Jr, 1992. " Accounts Receivable Management Policy: Theory and Evidence," Journal of Finance, American Finance Association, American Finance Association, vol. 47(1), pages 169-200, March.
  7. Oliver Hart & John Moore, 1997. "Default and Renegotiation: A Dynamic Model of Debt," Harvard Institute of Economic Research Working Papers 1792, Harvard - Institute of Economic Research.
  8. Lummer, Scott L. & McConnell, John J., 1989. "Further evidence on the bank lending process and the capital-market response to bank loan agreements," Journal of Financial Economics, Elsevier, Elsevier, vol. 25(1), pages 99-122, November.
  9. Takeo Hoshi & Anil Kashyap & David Scharfstein, 1989. "Bank monitoring and investment: evidence from the changing structure of Japanese corporate banking relations," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 86, Board of Governors of the Federal Reserve System (U.S.).
  10. Rajan, Raghuram G, 1992. " Insiders and Outsiders: The Choice between Informed and Arm's-Length Debt," Journal of Finance, American Finance Association, American Finance Association, vol. 47(4), pages 1367-400, September.
  11. James, Christopher, 1987. "Some evidence on the uniqueness of bank loans," Journal of Financial Economics, Elsevier, Elsevier, vol. 19(2), pages 217-235, December.
  12. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  13. Steven Kaplan & Bernadette Minton, 1993. "'Outside' Intervention in Japanese Companies: Its Determinants and Implications for Mangers," NBER Working Papers 4276, National Bureau of Economic Research, Inc.
  14. Hannan, Timothy H., 1991. "Bank commercial loan markets and the role of market structure: evidence from surveys of commercial lending," Journal of Banking & Finance, Elsevier, vol. 15(1), pages 133-149, February.
  15. James, Christopher & Wier, Peggy, 1990. "Borrowing relationships, intermediation, and the cost of issuing public securities," Journal of Financial Economics, Elsevier, Elsevier, vol. 28(1-2), pages 149-171.
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