Do Banks Lend to Distressed Firms?

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

FRBSF Economic Letter, 2023, vol. 2023, issue 31, 5

Abstract: Concerns emerged during the COVID-19 pandemic over banks continuing to lend to unproductive businesses that were close to default. Recent research shows that lenders have incentives to offer relatively better terms to less-productive and more-indebted firms to recover their prior investments. U.S. loan-level data confirm the empirical relevance of such lending behavior. A rich model of firms and banks further emphasizes that this type of lending can also depress overall productivity by sustaining firms that should otherwise exit the economy.

Keywords: covid19; bank lending; firms; banks (search for similar items in EconPapers)
Date: 2023
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