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Loan Maturity and renegotiation evidence from the lending practices of large and small banks

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  • Ugo Albertazzi

Abstract

Corporate finance theories suggest that problems of asymmetric information and moral hazard in credit markets can be addressed by choosing short-term maturities. Theories of debt renegotiation suggest that the credibility of the implicit commitment to not make concessions to insolvent borrowers, which would undermine the effectiveness of short-term maturities, is related to the characteristics of the lender and in particular to its size. the joint implication of these theories is that, for given borrower's characteristics, small banks should be less willing to issue long term, loans. Using information on Italian banks, this study presents a cross-sectional analysis of the maturity of loans to firms and shows a first evidence consistent with this prediction. With more opaque borrowers, like small and innovative firms, other supply-side features (special regulatory regimes favouring lending relationships and economies of scale in the screening technology) are also shown to be relevant in the determination of loan maturity.JEL Codes: G21, G32Keywords: maturity; renegotiation; adverse selection; moral hazard; short-termism

Suggested Citation

  • Ugo Albertazzi, 2007. "Loan Maturity and renegotiation evidence from the lending practices of large and small banks," FMG Discussion Papers dp588, Financial Markets Group.
  • Handle: RePEc:fmg:fmgdps:dp588
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    1. repec:ire:issued:v:20:n:03:2017:p:325-348 is not listed on IDEAS

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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • 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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