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Creditor Passivity: The Effects of Bank Competition and Institutions on the Strategic Use of Bankruptcy Filings

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  • Hainz, Christa

Abstract

Why do banks remain passive? In a model of bank-firm relationship we study the trade-off a bank faces when having defaulting firms declared bankrupt. First, the bank receives a payoff if a firm is liquidated. Second, it provides information about a firm’s type to its competitors. Thereby, asymmetric information between banks is reduced and bank competition intensifies. We find that the better the institutions and the more competitive the banking sector, the higher the bank’s incentive to bankrupt defaulting firms. This makes information between banks less asymmetric and thus leads to lower interest rates and less credit rationing.

Suggested Citation

  • Hainz, Christa, 2007. "Creditor Passivity: The Effects of Bank Competition and Institutions on the Strategic Use of Bankruptcy Filings," Discussion Papers in Economics 2028, University of Munich, Department of Economics.
  • Handle: RePEc:lmu:muenec:2028
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    References listed on IDEAS

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    Cited by:

    1. Christa Hainz, 2011. "Measuring Information Sharing in Credit Markets," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 9(1), pages 21-27, 05.
    2. repec:ces:ifodic:v:9:y:2011:i:1:p:15790752 is not listed on IDEAS

    More about this item

    Keywords

    Creditor passivity; bank competition; information sharing; institutions; bankruptcy; relationship banking;

    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
    • K10 - Law and Economics - - Basic Areas of Law - - - General (Constitutional Law)
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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