Banking on Experience. Capital Reallocation, Asset Knowledge, and the Structure of Credit Contracts

Qingqing Cao, Hans Degryse, Sotirios Kokas and Raoul Minetti

No 25-25, Working Papers from Federal Reserve Bank of Cleveland

Abstract: The firm sector continuously engages in the reallocation of physical capital. We study the implications for credit market outcomes of banks' engagement in borrowing firms' capital reallocation. We develop a model in which banks' experience with the reallocation opportunities of physical capital raises their ability to recover liquidation values after firm defaults and asset reallocations, diluting banks' incentives to monitor borrowers. To test the model, we then construct an empirical measure of banks' engagement in capital reallocation using US loan-level data matched with firm-level data on capital asset transactions. We find that, unlike lending relationships and experience with co-lenders, capital allocation engagement dilutes banks' monitoring incentives, calling for larger involvement in loan syndication.

Keywords: banks; experience; capital allocation; sector specialization; monitoring (search for similar items in EconPapers)
JEL-codes: D8 G21 (search for similar items in EconPapers)
Pages: 75
Date: 2025-12-17
References: Add references at CitEc
Citations:

Downloads: (external link)
https://doi.org/10.26509/frbc-wp-202525 Persistent link (text/html)
https://www.clevelandfed.org/-/media/project/cleve ... pers/2025/wp2525.pdf Full text (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedcwq:102233

Ordering information: This working paper can be ordered from

DOI: 10.26509/frbc-wp-202525

Access Statistics for this paper

More papers in Working Papers from Federal Reserve Bank of Cleveland Contact information at EDIRC.
Bibliographic data for series maintained by 4D Library ().