Evergreening

Miguel Faria-e-Castro, Pascal Paul and Juan Sanchez

Journal of Financial Economics, 2024, vol. 153, issue C

Abstract: We develop a simple model of concentrated lending where lenders have incentives for evergreening loans by offering better terms to firms that are close to default. We detect such lending behavior using loan-level supervisory data for the United States. Banks that own a larger share of a firm's debt provide distressed firms with relatively more credit at lower interest rates. Building on this empirical validation, we incorporate the theoretical mechanism into a dynamic heterogeneous-firm model to show that evergreening affects aggregate outcomes, resulting in lower interest rates, higher levels of debt, and lower productivity.

Keywords: Evergreening; Zombie firms; Bank lending; Misallocation (search for similar items in EconPapers)
JEL-codes: D24 D53 E44 G21 O47 (search for similar items in EconPapers)
Date: 2024
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Working Paper: Evergreening (2023)
Working Paper: Evergreening (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:153:y:2024:i:c:s0304405x24000011

DOI: 10.1016/j.jfineco.2024.103778

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