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Why Do Firms Borrow Directly from Nonbanks?

Author

Listed:
  • Sergey Chernenko
  • Isil Erel
  • Robert Prilmeier

Abstract

Analyzing hand-collected credit agreements for a sample of middle-market firms over 2010–2015, we find that one-third of all loans are directly extended by nonbank financial intermediaries. Two-thirds of such nonbank lending can be attributed to bank regulations that constrain banks’ ability to lend to unprofitable and highly levered borrowers. Firms with negative EBITDA and debt/EBITDA greater than six are 32 and 15 more likely to borrow from nonbanks. These firms pay significantly higher interest rates, especially following the 2013 leveraged loan guidance revisions. Nonbank borrowers also receive different nonprice terms compared to firms borrowing from banks.Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Suggested Citation

  • Sergey Chernenko & Isil Erel & Robert Prilmeier, 2022. "Why Do Firms Borrow Directly from Nonbanks?," The Review of Financial Studies, Society for Financial Studies, vol. 35(11), pages 4902-4947.
    • Handle: RePEc:oup:rfinst:v:35:y:2022:i:11:p:4902-4947.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhac016
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    Citations

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    Cited by:

    1. Ahmet Degerli & Jing Wang, 2022. "The Rise of Nonbanks and the Quality of Financial Services: Evidence from Consumer Complaints," Finance and Economics Discussion Series 2022-059, Board of Governors of the Federal Reserve System (U.S.).
    2. Bryan Stuart, 2024. "Inequality Research Review: Gender Gaps in the Labor Market," Economic Insights, Federal Reserve Bank of Philadelphia, vol. 9(3), pages 10-14, September.
    3. Gaffney, Edward & McGeever, Niall, 2022. "The SME-lender relationship network in Ireland," Financial Stability Notes 14/FS/22, Central Bank of Ireland.
    4. Sharjil M. Haque & Simon Mayer & Teng Wang, 2024. "How Private Equity Fuels Non-Bank Lending," Finance and Economics Discussion Series 2024-015, Board of Governors of the Federal Reserve System (U.S.).
    5. Dominic Cucic & Denis Gorea, 2024. "Non-bank lending and the transmission of monetary policy," BIS Working Papers 1211, Bank for International Settlements.
    6. Eichholtz, Piet & Ongena, Steven & Simeth, Nagihan & Yönder, Erkan, 2023. "Banks, non-banks, and the incorporation of local information in CMBS loan pricing," Journal of Banking & Finance, Elsevier, vol. 154(C).
    7. Mary Chen & Seung Jung Lee & Daniel Neuhann & Farzad Saidi, 2024. "Less Bank Regulation, More Non-Bank Lending," ECONtribute Discussion Papers Series 303, University of Bonn and University of Cologne, Germany.
    8. Nirupama Kulkarni & Kanika Mahajan & S.K. Ritadhi, 2023. "Bank Branch Expansions and Capital Investment by Credit Constrained Firms," Working Papers 93, Ashoka University, Department of Economics.
    9. James DiSalvo, 2024. "Banking Trends: Why Banks Finance Their Nonbank Competitors," Economic Insights, Federal Reserve Bank of Philadelphia, vol. 9(3), pages 15-21, September.
    10. Jiang, Bo, 2024. "The real effect of shadow banking regulation: Evidence from China," Emerging Markets Review, Elsevier, vol. 59(C).
    11. Manasa Gopal & Philipp Schnabl, 2022. "The Rise of Finance Companies and FinTech Lenders in Small Business Lending," The Review of Financial Studies, Society for Financial Studies, vol. 35(11), pages 4859-4901.
    12. Jeffrey Brinkman, 2024. "Population, Prices, and Amenities," Economic Insights, Federal Reserve Bank of Philadelphia, vol. 9(3), pages 2-9, September.
    13. James DiSalvo, 2024. "Banking Trends: Why Banks Finance Their Nonbank Competitors," Banking Trends, Federal Reserve Bank of Philadelphia, pages 1-7, September.
    14. Giovanni Favara & Camelia Minoiu & Ander Pérez-Orive, 2024. "Zombie Lending to U.S. Firms," FRB Atlanta Working Paper 2024-7, Federal Reserve Bank of Atlanta.
    15. Mary Chen & Seung Jung Lee & Daniel Neuhann & Farzad Saidi, 2023. "Less Bank Regulation, More Non-Bank Lending," Finance and Economics Discussion Series 2023-026, Board of Governors of the Federal Reserve System (U.S.).
    16. Nicoletti, Giulio & Rariga, Judit & Rodriguez d’Acri, Costanza, 2024. "Spare tyres with a hole: investment funds under stress and credit to firms," Working Paper Series 2917, European Central Bank.

    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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