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How Are Loans by Their Main Bank Priced? Bank Effects, Information and Non-price Terms of Contract

  • Wako WATANABE

We analyze how loans to Japanese small and medium entities by their main banks are priced using the matched data of firms and their main banks. The data on firms include informational characteristics of firms collected in the survey. Our findings are: 1. The borrower's transparency (to its main bank) does not affect the borrowing rate. 2. The firm's solvency reduces the borrowing rate. These are consistent with predictions of finance theories based on information economics. We also found that treating non-price terms of a loan contract as endogenous is crucial in consistently estimating the firm's borrowing rate.

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Paper provided by Research Institute of Economy, Trade and Industry (RIETI) in its series Discussion papers with number 05028.

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Length: 45 pages
Date of creation: Nov 2005
Date of revision:
Handle: RePEc:eti:dpaper:05028
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