Bank Lending Practices and Size-Dependent Credit Treatment: An Endogenous Audit Threshold

Ghasan Asbool and Damiano Turchet
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Ghasan Asbool: University of Warwick
Damiano Turchet: University of Warwick

The Warwick Economics Research Paper Series (TWERPS) from University of Warwick, Department of Economics

Abstract: How can credit-market frictions generate heterogeneous investment responses across firms of different sizes? We develop a model in which lenders choose whether to incur auditing costs when lending to firms whose idiosyncratic productivity shocks are otherwise unobservable. The lender’s optimisation problem gives rise to an endogenous capital threshold that separates firms into different credit-treatment regimes. As aggregate conditions change, movements in this threshold alter firms’ access to credit and generate non-uniform credit responses across the size distribution. The model provides a financial-frictions channel through which medium-sized firms may experience disproportionately larger investment declines during recessions, through a credit channel. We thereby offer a foundation for studying the investment patterns, such as the ones exhibited by UK firms during the financial crisis and by German firms over 1970–1986

Keywords: Bank Lending Practices; SME; Corporate Banking; Credit Discrimination; Investment Specific Technology Shocks JEL codes: E44; G21 (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:wrk:warwec:1636

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