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Loan maturity and renegotiation evidence from the lending practices of large and small banks

Ugo Albertazzi

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Corporate finance theories suggest that problems of asymmetric information and moral hazard in credit markets can be addressed by choosing short-term maturities. Theories of debt renegotiation suggest that the credibility of the implicit commitment to not make concessions to insolvent borrowers, which would undermine the effectiveness of short-term maturities, is related to the characteristics of the lender and in particular to its size. the joint implication of these theories is that, for given borrower's characteristics, small banks should be less willing to issue long term, loans. Using information on Italian banks, this study presents a cross-sectional analysis of the maturity of loans to firms and shows a first evidence consistent with this prediction. With more opaque borrowers, like small and innovative firms, other supply-side features (special regulatory regimes favouring lending relationships and economies of scale in the screening technology) are also shown to be relevant in the determination of loan maturity.

Keywords: Maturity; Renegotiation; Adverse selection; Moral hazard; Short-termism (search for similar items in EconPapers)
JEL-codes: G21 G32 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2007-02-01
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Citations: View citations in EconPapers (1)

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Working Paper: Loan Maturity and renegotiation evidence from the lending practices of large and small banks (2007) Downloads
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