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Bank equity stakes in borrowing firms and credit market competition

  • Rapisarda, Grazia
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    In this paper we analyse the effect of banks holding equity stakes in borrowing firms on the equilibrium level of interest rates and on the tendency of the borrowing firm to establish tighter links with the shareholding bank. Equity claims are defined as rights to receive dividend payments as well as private information about the firm. By modeling competition as an asymmetric common value auction, we show that when one of the competing banks in the credit market holds an equity claim in the firm, the equilibrium expected cost of debt increases with the size of the equity stake and the firm tends to concentrate his credit relationships around the shareholding bank

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    File URL: http://eprints.soton.ac.uk/33122/1/0022.pdf
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    Paper provided by Economics Division, School of Social Sciences, University of Southampton in its series Discussion Paper Series In Economics And Econometrics with number 0022.

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    Date of creation: 01 Jan 2000
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    Handle: RePEc:stn:sotoec:0022
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    1. Sharpe, Steven A, 1990. " Asymmetric Information, Bank Lending, and Implicit Contracts: A Stylized Model of Customer Relationships," Journal of Finance, American Finance Association, vol. 45(4), pages 1069-87, September.
    2. Cable, John R, 1985. "Capital Market Information and Industrial Performance: The Role of West German Banks," Economic Journal, Royal Economic Society, vol. 95(377), pages 118-32, March.
    3. Prowse, Stephen D, 1992. " The Structure of Corporate Ownership in Japan," Journal of Finance, American Finance Association, vol. 47(3), pages 1121-40, July.
    4. Prowse, Stephen D., 1990. "Institutional investment patterns and corporate financial behavior in the United States and Japan," Journal of Financial Economics, Elsevier, vol. 27(1), pages 43-66, September.
    5. Sheard, Paul, 1989. "The Japanese general trading company as an aspect of interfirm risk-sharing," Journal of the Japanese and International Economies, Elsevier, vol. 3(3), pages 308-322, September.
    6. von Thadden, Ernst-Ludwig, 2004. "Asymmetric information, bank lending and implicit contracts: the winner's curse," Finance Research Letters, Elsevier, vol. 1(1), pages 11-23, March.
    7. Hoshi, Takeo & Kashyap, Anil & Scharfstein, David, 1991. "Corporate Structure, Liquidity, and Investment: Evidence from Japanese Industrial Groups," The Quarterly Journal of Economics, MIT Press, vol. 106(1), pages 33-60, February.
    8. Engelbrecht-Wiggans, Richard & Milgrom, Paul R. & Weber, Robert J., 1983. "Competitive bidding and proprietary information," Journal of Mathematical Economics, Elsevier, vol. 11(2), pages 161-169, April.
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