Abstract

http://ssrn.com/abstract=687556
 
 

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Bank Loans, Bonds, and Information Monopolies Across the Business Cycle


João A. C. Santos


Federal Reserve Bank of New York

Andrew Winton


University of Minnesota - Twin Cities - Carlson School of Management

December 21, 2006

AFA 2006 Boston Meetings Paper

Abstract:     
Theory suggests that banks' private information about borrowers lets them hold up borrowers for higher interest rates. Since hold-up power increases with borrower risk, banks with exploitable information should be able to raise their rates in recessions by more than is justified by borrower risk alone. We test this hypothesis by comparing the pricing of loans for bank-dependent borrowers with the pricing of loans for borrowers with access to public debt markets, controlling for loan- and firm-specific risk factors. Loan spreads rise in recessions, but firms with public debt market access pay lower spreads and their spreads rise significantly less in recessions. Our findings suggest that, during recessions, banks do in fact charge higher rates to customers with limited outside funding options, and that the magnitude of this effect is economically significant.

Number of Pages in PDF File: 57

Keywords: bank loans, bonds, information rents, hold-up problem

JEL Classification: G21, G32

working papers series


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Date posted: March 26, 2005  

Suggested Citation

Santos, João A. C. and Winton, Andrew, Bank Loans, Bonds, and Information Monopolies Across the Business Cycle (December 21, 2006). AFA 2006 Boston Meetings Paper. Available at SSRN: http://ssrn.com/abstract=687556 or http://dx.doi.org/10.2139/ssrn.687556

Contact Information

João A. C. Santos
Federal Reserve Bank of New York ( email )
33 Liberty Street
New York, NY 10045
United States
212-720-5583 (Phone)
212-720-8363 (Fax)
HOME PAGE: HTTP://WWW.NEWYORKFED.ORG/RMAGHOME/ECONOMIST/SANTOS/CONTACT.HTML
Andrew Winton (Contact Author)
University of Minnesota - Twin Cities - Carlson School of Management ( email )
321 19th Avenue South
Department of Finance
Minneapolis, MN 55455
United States
612-624-0589 (Phone)
612-626-1335 (Fax)
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