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On the Role of Bank Competition for Corporate Finance and Corporate Control in Transition Economies

  • Monika Schnitzer

Banks play a central role in financing and monitoring firms in transition economies. We study how bank competition affects the efficiency of the credit allocation, the monitoring of firms, and the firms' restructuring effort. In our model, banks compete to finance an investment project with uncertain return. By screening the firm, a bank learns about its profitability. Surprisingly, we find that an increase in bank competition need not reduce a bank's screening incentives even though it lowers its expected profits. Furthermore, competition has a positive impact on the firm's restructuring effort. This suggests a positive role for bank competition in transition economies.

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Article provided by Mohr Siebeck, Tübingen in its journal Journal of Institutional and Theoretical Economics.

Volume (Year): 155 (1999)
Issue (Month): 1 (March)
Pages: 22-

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Handle: RePEc:mhr:jinste:urn:sici:0932-4569(199903)155:1_22:otrobc_2.0.tx_2-2
Contact details of provider: Web page: http://www.mohr.de/jite

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  1. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
  2. Schmidt, Klaus M., 1996. "Managerial Incentives and Product Market Competition," CEPR Discussion Papers 1382, C.E.P.R. Discussion Papers.
  3. Sharpe, Steven A, 1990. " Asymmetric Information, Bank Lending, and Implicit Contracts: A Stylized Model of Customer Relationships," Journal of Finance, American Finance Association, vol. 45(4), pages 1069-87, September.
  4. Broecker, Thorsten, 1990. "Credit-Worthiness Tests and Interbank Competition," Econometrica, Econometric Society, vol. 58(2), pages 429-52, March.
  5. Michael H. Riordan, 1992. "Competition and Bank Performance: A Theoretical Perspective," Papers 0026, Boston University - Industry Studies Programme.
  6. Mayer, Colin, 1988. "New issues in corporate finance," European Economic Review, Elsevier, vol. 32(5), pages 1167-1183, June.
  7. Hart, Oliver & Moore, John, 1994. "A Theory of Debt Based on the Inalienability of Human Capital," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 841-79, November.
  8. Dittus, Peter, 1996. "Why East European banks don't want equity," European Economic Review, Elsevier, vol. 40(3-5), pages 655-662, April.
  9. Caminal, Ramon & Matutes, Carmen, 1997. "Bank Solvency, Market Structure, and Monitoring Incentives," CEPR Discussion Papers 1665, C.E.P.R. Discussion Papers.
  10. Matutes, Carmen & Vives, Xavier, 1996. "Competition for Deposits, Fragility, and Insurance," Journal of Financial Intermediation, Elsevier, vol. 5(2), pages 184-216, April.
  11. Yanelle, Marie-Odile, 1997. "Banking Competition and Market Efficiency," Review of Economic Studies, Wiley Blackwell, vol. 64(2), pages 215-39, April.
  12. von Thadden, Ernst-Ludwig, 1995. "Long-Term Contracts, Short-Term Investment and Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 62(4), pages 557-75, October.
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