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The Structure of Multiple Credit Relationships: Evidence from US Firms

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  • Luigi Guiso
  • Raoul Minetti

Abstract

When firms borrow from multiple concentrated creditors such as banks they appear to differentiate their allocation of borrowing. In this paper, we put forward hypotheses for this borrowing pattern based on incomplete contract theories and test them using a sample of small U.S. firms. We find that firms with more valuable, more redeployable, and more homogeneous assets differentiate borrowing more sharply across their concentrated creditors. We also find that borrowing differentiation is inversely related to restructuring costs and positively related to firms’ informational transparency. This evidence supports the predictions of incomplete contract theories: the structure of credit relationships appears to be used as a device to discipline creditors and entrepreneurs, especially during corporate reorganizations.

Suggested Citation

  • Luigi Guiso & Raoul Minetti, 2007. "The Structure of Multiple Credit Relationships: Evidence from US Firms," Economics Working Papers ECO2007/46, European University Institute.
    • Handle: RePEc:eui:euiwps:eco2007/46
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    More about this item

    Keywords

    Credit Relationships; Multiple Creditors; Borrowing Allocation;
    All these keywords.

    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
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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