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Do Banks Provide Financial Slack?

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  • Charles J. Hadlock
  • Christopher M. James

Abstract

We study the decision to choose bank debt rather than public securities in a firm's marginal financing choice. Using a sample of 500 firms over the 1980 to 1993 time period, we find that firms are relatively more likely to choose bank loans when variables that measure asymmetric information problems are elevated. The sensitivity of the likelihood of choosing bank debt to information problems is greater for firms with no public debt outstanding. These results are consistent with the hypothesis that banks help alleviate asymmetric information problems and that firms weigh these information benefits against a wide range of contracting costs when choosing bank financing.

Suggested Citation

  • Charles J. Hadlock & Christopher M. James, 2002. "Do Banks Provide Financial Slack?," Journal of Finance, American Finance Association, vol. 57(3), pages 1383-1419, June.
    • Handle: RePEc:bla:jfinan:v:57:y:2002:i:3:p:1383-1419
    DOI: 10.1111/1540-6261.00464
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    References listed on IDEAS

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