Product Market Imperfections and Loan Commitments

Vojislav Maksimovic

Journal of Finance, 1990, vol. 45, issue 5, 1641-53

Abstract: The author shows, in a model of competitive banks, that the characteristics of loan contracts are affected by product market imperfections in the borrower's industry. A bank loan commitment increases the value of a borrower firm operating in an imperfectly competitive industry and, thus, dominates a simple loan even in the absence of risk sharing considerations and informational asymmetries between the borrower and the bank. While it is individually rational for a firm to obtain a loan commitment, all the firms in that industry taken together are made worse off by the existence of loan commitments. Copyright 1990 by American Finance Association.

Date: 1990
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