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Informal Financial Networks: Theory and Evidence

  • Mark J. Garmaise
  • Tobias J. Moskowitz
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    We develop a model of informal financial networks and present corroborating evidence by studying the role of professional property brokers in the U.S. commercial real estate market. Our model demonstrates how service intermediaries, who do not supply finance themselves, can facilitate their clients' access to finance via repeated informal relationships with lenders. Empirically, we find that, controlling for endogenous broker selection, hiring a broker strikingly increases the probability of obtaining a bank loan from 40 to 58 percent. Our results demonstrate that even in the U.S., with its well-developed capital markets, informal networks play an important role in controlling access to finance.

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    File URL: http://www.nber.org/papers/w8874.pdf
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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8874.

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    Date of creation: Apr 2002
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    Publication status: published as Garmaise, Mark and Tobias J. Moskowitz. “Informal Financial Networks: Theory and Evidence." Review of Financial Studies 16, 4 (2003): 1007-1040.
    Handle: RePEc:nbr:nberwo:8874
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    1. Cobham, David & Subramaniam, Ramesh, 1998. "Corporate finance in developing countries: New evidence for India," World Development, Elsevier, vol. 26(6), pages 1033-1047, June.
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    8. Mason, Colin M & Harrison, Richard T, 1997. "Business Angel Networks and the Development of the Informal Venture Capital Market in the U.K.: Is There Still a Role for the Public Sector?," Small Business Economics, Springer, vol. 9(2), pages 111-23, April.
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    13. Puri, Manju, 1996. "Commercial banks in investment banking Conflict of interest or certification role?," Journal of Financial Economics, Elsevier, vol. 40(3), pages 373-401, March.
    14. Puri, Manju, 1994. "The long-term default performance of bank underwritten security issues," Journal of Banking & Finance, Elsevier, vol. 18(2), pages 397-418, January.
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