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Network-motivated Lending Decisions: A Rationale for Forbearance

Author

Listed:
  • Yoshiaki Ogura
  • Ryo Okui
  • Yukiko Umeno Saito

Abstract

We demonstrate theoretically and empirically the presence of forbearance lending by profit maximizing banks to influential buyers in a supply network. If the financial market is concentrated, then banks can internalize the negative externality of an influential firm¡¯s exit. As a result, they may keep refinancing for a loss-making influential firm at an interest rate lower than the prime rate. This mechanism sheds new light on the discussion about bailouts offered to zombie firms. Our empirical study, with a unique dataset containing information about interfirm relationships and main banks, provides evidence for such network-motivated lending decisions.

Suggested Citation

  • Yoshiaki Ogura & Ryo Okui & Yukiko Umeno Saito, 2019. "Network-motivated Lending Decisions: A Rationale for Forbearance," Working Paper Series no127, Institute of Economic Research, Seoul National University.
    • Handle: RePEc:snu:ioerwp:no127
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    Keywords

    supply network; influence coefficient; forbearance; bailout; zombie;
    All these keywords.

    JEL classification:

    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis
    • D57 - Microeconomics - - General Equilibrium and Disequilibrium - - - Input-Output Tables and Analysis
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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