Adverse Selection and Search Frictions in Corporate Loan Contracts

Mehdi Beyhaghi, Babak Mahmoudi and Ali Mohammadi ()

MPRA Paper from University Library of Munich, Germany

Abstract: We provide empirical evidence of both (1) price dispersion and (2) credit rationing in the corporate loan market. We argue that these properties are caused by two factors: an adverse selection resulting from the information asymmetry between lenders and borrowers, and search frictions in matching borrowers with lenders. We develop a model of loan markets in which lenders post an array of heterogeneous contracts, then borrowers tradeoff terms of loan contracts and matching probability between themselves. We show that a unique separating equilibrium exists where each type of borrower applies to a certain type of contract.

Keywords: loan contract; capital structure; debt heterogeneity; adverse selection; competitive search (search for similar items in EconPapers)
JEL-codes: D86 G20 G21 G32 (search for similar items in EconPapers)
Date: 2013-09-12
New Economics Papers: this item is included in nep-cta and nep-dge
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https://mpra.ub.uni-muenchen.de/49780/2/MPRA_paper_49780.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/69018/2/MPRA_paper_49780.pdf revised version (application/pdf)

Related works:
Working Paper: Adverse Selection and Search Frictions in Corporate Loan Contracts (2014)
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