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Costs and benefits of creditor concentration: An empirical approach

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  • Amanda Carmignani

    () (Bank of Italy)

  • Massimo Omiccioli

    () (Bank of Italy)

Abstract

High concentration of creditors can have two beneficial effects on borrowers: i) by enhancing lenders� ability to monitor, it can reduce the likelihood of financial distress; ii) by reducing coordination failure among creditors, it can help a distressed firm to avoid bankruptcy. However, a strong probability of debt renegotiation can exert a feedback effect on the likelihood of financial distress, by generating perverse ex-ante incentives for borrowers (soft budget constraint). Moreover, high concentration of creditors can expose borrowers to greater liquidity risks. Using Italian data on manufacturing firms, we try to separate empirically these conflicting effects. Our results show that, if we control for the soft-budget-constraint and liquidity effects, high concentration of bank credit reduces the likelihood of financial distress and liquidation, as predicted by the literature on relationship banking. But these benefits do not come without costs: i) enhanced monitoring is offset by the soft-budget-constraint effect and ii) higher concentration of credit lines increases liquidity risks and thus makes both financial distress and liquidation more likely. Ultimately, the overall effect of more concentrated banking relations is a lower probability of liquidation but a higher probability of financial distress. This helps to explain the widespread existence of multiple but asymmetric banking relations in Italy.

Suggested Citation

  • Amanda Carmignani & Massimo Omiccioli, 2007. "Costs and benefits of creditor concentration: An empirical approach," Temi di discussione (Economic working papers) 645, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:wptemi:td_645_07
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    1. repec:kap:jfsres:v:51:y:2017:i:3:d:10.1007_s10693-016-0250-5 is not listed on IDEAS
    2. Bonfim, Diana & Dias, Daniel A. & Richmond, Christine, 2012. "What happens after corporate default? Stylized facts on access to credit," Journal of Banking & Finance, Elsevier, vol. 36(7), pages 2007-2025.
    3. Giacinto Micucci & Paola Rossi, 2010. "Debt restructuring and the role of lending technologies," Temi di discussione (Economic working papers) 763, Bank of Italy, Economic Research and International Relations Area.
    4. Giacomo Cau & Massimiliano Stacchini, 2010. "The certification role of bank directors on;corporate boards," Mo.Fi.R. Working Papers 46, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
    5. Diana Bonfim & Daniel Dias & Christine Richmond, 2011. "What Happens After Default? Stylized Facts on Access to Credit," Working Papers w201101, Banco de Portugal, Economics and Research Department.
    6. Franco Fiordelisi & Stefano Monferrà & Gabriele Sampagnaro, 2014. "Relationship Lending and Credit Quality," Journal of Financial Services Research, Springer;Western Finance Association, vol. 46(3), pages 295-315, December.
    7. Enrico Beretta & Silvia Del Prete, 2013. "Banking consolidation and bank-firm credit relationships: the role of geographical features and relationship characteristics," Temi di discussione (Economic working papers) 901, Bank of Italy, Economic Research and International Relations Area.
    8. Agostino, Mariarosaria & Gagliardi, Francesca & Trivieri, Francesco, 2010. "Credit market structure and bank screening: An indirect test on Italian data," Review of Financial Economics, Elsevier, vol. 19(4), pages 151-160, October.

    More about this item

    Keywords

    financial distress; liquidazione; monitoring; relationship lending; soft budget constraint;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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