Heterogeneous multiple bank financing: does it reduce inefficient credit-renegotation incidences?

Christina Bannier

No 83, Frankfurt School - Working Paper Series from Frankfurt School of Finance and Management

Abstract: Small and medium-sized firms often obtain capital via a mixture of relationship and arm's-length bank lending. We show that such heterogeneous multiple bank financing leads to a lower probability of ineefficient credit foreclosure than both monopoly relationship lending and homogeneous multiple bank financing. Yet, in order to reduce hold-up and coordination-failure risk, the relationship bank's fraction of total firm debt must not become too large. For firms with intermediate expected profits, the probability of ineefficient credit-renegotiation is shown to decrease along with the relationship bank's information precision. For firms with extremely high or extremely low expected returns, however, it increases.

Keywords: Relationship lending; asymmetric information; financial distress; hold-up; coordination failure (search for similar items in EconPapers)
JEL-codes: D82 G21 L14 (search for similar items in EconPapers)
Date: 2007
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Journal Article: Heterogeneous multiple bank financing: does it reduce inefficient credit-renegotiation incidences? (2007)
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