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Evergreening

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

No 2021-012, Working Papers from Federal Reserve Bank of St. Louis

Abstract: We develop a simple model of relationship 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: E43 E44 E60 G21 G32 (search for similar items in EconPapers)
Pages: 67 pages
Date: 2021-10-22, Revised 2023-01
New Economics Papers: this item is included in nep-ban, nep-cfn, nep-dge, nep-fdg and nep-mac
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DOI: 10.20955/wp.2021.012

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