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Heterogeneous multiple bank financing: does it reduce inefficient credit-renegotation incidences?

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  • Bannier, Christina E.

Abstract

Small and medium-sized firms often obtain capital via a mixture of relationship and arm's-length bank lending. We show that such heterogeneous multiple bank financing leads to a lower probability of ineefficient credit foreclosure than both monopoly relationship lending and homogeneous multiple bank financing. Yet, in order to reduce hold-up and coordination-failure risk, the relationship bank's fraction of total firm debt must not become too large. For firms with intermediate expected profits, the probability of ineefficient credit-renegotiation is shown to decrease along with the relationship bank's information precision. For firms with extremely high or extremely low expected returns, however, it increases. --

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Bibliographic Info

Paper provided by Frankfurt School of Finance and Management in its series Frankfurt School - Working Paper Series with number 83.

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Date of creation: 2007
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Handle: RePEc:zbw:fsfmwp:83

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Keywords: Relationship lending; asymmetric information; financial distress; hold-up; coordination failure;

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