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

  • Christina Bannier

    ()

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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File URL: http://hdl.handle.net/10.1007/s11408-007-0062-6
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Article provided by Springer in its journal Financial Markets and Portfolio Management.

Volume (Year): 21 (2007)
Issue (Month): 4 (December)
Pages: 445-470

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Handle: RePEc:kap:fmktpm:v:21:y:2007:i:4:p:445-470
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