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On the role of bank competition for corporate finance and corporate control in transition economies

  • Schnitzer, Monika

Banks play a central role in financing and monitoring Firms intransition economies. We study how bank competition affects theefficiency of the credit allocation, the monitoring of firms, and thefirms’ restructuring effort. In our model, banks compete to finance aninvestment project with uncertain return. By screening the firm, a banklearns about its profitability. Surprisingly, we find that an increasein bank competition need not reduce a bank’s screening incentives eventhough it lowers its expected profits. Furthermore, competition has apositive impact on the firm’s restructuring effort. This suggests apositive role for bank competition in transition economies.

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Paper provided by University of Munich, Department of Economics in its series Munich Reprints in Economics with number 19899.

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Date of creation: 1999
Date of revision:
Publication status: Published in Journal of Institutional and Theoretical Economics (JITE) 1 155(1999): pp. 22-46
Handle: RePEc:lmu:muenar:19899
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  1. Oliver Hart & John Moore, 1991. "A Theory of Debt Based on the Inalienability of Human Capital," NBER Working Papers 3906, National Bureau of Economic Research, Inc.
  2. Steven A. Sharpe, 1989. "Asymmetric information, bank lending, and implicit contracts: a stylized model of customer relationships," Finance and Economics Discussion Series 70, Board of Governors of the Federal Reserve System (U.S.).
  3. Schmidt, Klaus M, 1997. "Managerial Incentives and Product Market Competition," Review of Economic Studies, Wiley Blackwell, vol. 64(2), pages 191-213, April.
  4. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
  5. Matutes, Carmen & Vives, Xavier, 1996. "Competition for Deposits, Fragility, and Insurance," Journal of Financial Intermediation, Elsevier, vol. 5(2), pages 184-216, April.
  6. Mayer, Colin, 1987. "New Issues in Corporate Finance," CEPR Discussion Papers 181, C.E.P.R. Discussion Papers.
  7. Yanelle, Marie-Odile, 1997. "Banking Competition and Market Efficiency," Review of Economic Studies, Wiley Blackwell, vol. 64(2), pages 215-39, April.
  8. Caminal, Ramon & Matutes, Carmen, 1997. "Bank Solvency, Market Structure, and Monitoring Incentives," CEPR Discussion Papers 1665, C.E.P.R. Discussion Papers.
  9. Michael H. Riordan, 1992. "Competition and Bank Performance: A Theoretical Perspective," Papers 0026, Boston University - Industry Studies Programme.
  10. Dittus, Peter, 1996. "Why East European banks don't want equity," European Economic Review, Elsevier, vol. 40(3-5), pages 655-662, April.
  11. 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.
  12. Broecker, Thorsten, 1990. "Credit-Worthiness Tests and Interbank Competition," Econometrica, Econometric Society, vol. 58(2), pages 429-52, March.
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