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On the Nonexclusivity of Loan Contracts: An Empirical Investigation

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  • Hans Degryse

    () (Department of Accounting, Finance, and Insurance, KU Leuven, 3000 Leuven, Belgium; and Centre for Economic Policy Research (CEPR), London EC1V 0DX, United Kingdom)

  • Vasso Ioannidou

    () (Department of Accounting and Finance, Lancaster University, Lancaster LA1 4YX, United Kingdom; and Centre for Economic Policy Research (CEPR), London, EC1V 0DX, United Kingdom)

  • Erik von Schedvin

    () (Research Department, Sveriges Riksbank, SE-103 37 Stockholm, Sweden)

Abstract

We study how a bank’s willingness to lend to a previously exclusive firm changes once the firm obtains a loan from another bank (“outside loan”) and breaks an exclusive relationship. Using a difference-in-difference analysis and a setting where outside loans are observable, we document that an outside loan triggers a decrease in the initial bank’s willingness to lend to the firm, i.e., outside loans are strategic substitutes. Consistent with concerns about coordination problems and higher indebtedness, we find that this reaction is more pronounced the larger the outside loan and it is muted if the initial bank’s existing and future loans retain seniority and are protected with valuable collateral. Our results give a benevolent role to transparency enabling banks to mitigate adverse effects from outside loans. The resulting substitute behavior may also act as a stabilizing force in credit markets limiting positive comovements between lenders, decreasing the possibility of credit freezes and financial crises. This paper was accepted by Itay Goldstein, finance .

Suggested Citation

  • Hans Degryse & Vasso Ioannidou & Erik von Schedvin, 2016. "On the Nonexclusivity of Loan Contracts: An Empirical Investigation," Management Science, INFORMS, vol. 62(12), pages 3510-3533, December.
  • Handle: RePEc:inm:ormnsc:v:62:y:2016:i:12:p:3510-3533
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    File URL: http://dx.doi.org/10.1287/mnsc.2015.2277
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    1. repec:eee:jeborg:v:158:y:2019:i:c:p:526-542 is not listed on IDEAS
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    4. Ono, Arito & Hasumi, Ryo & Hirata, Hideaki, 2014. "Differentiated use of small business credit scoring by relationship lenders and transactional lenders: Evidence from firm–bank matched data in Japan," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 371-380.
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    More about this item

    Keywords

    coordination failures; credit freezes; credit rationing; credit supply; debt seniority; floating charge; negative externalities; nonexclusivity; transparency;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • 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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