Uncertainty and the Cost of Bank vs. Bond Finance

Christian Grimme

No 7456, CESifo Working Paper Series from CESifo

Abstract: How does uncertainty affect the costs of raising finance in the bond market and via bank loans? Empirically, this paper finds that heightened uncertainty is accompanied by an increase in corporate bond yields and a decrease in bank lending rates. This finding can be explained with a model that includes costly state verification and a special informational role for banks. To reduce uncertainty, banks acquire additional costly information about borrowers. More information increases the value of the lending relationship and lowers the lending rate. Bond investors demand compensation for the increased risk of firm default.

Keywords: uncertainty shocks; financial frictions; relationship banking; bank loan rate setting; information acquisition (search for similar items in EconPapers)
JEL-codes: E32 E43 E44 G21 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-ban, nep-cfn, nep-fmk and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Uncertainty and the Cost of Bank vs. Bond Finance (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_7456

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