Does Corporate Lending By Banks and Finance Companies Differ? Evidence on Specialization in Private Debt Contracting
Federal Reserve Board
Steven A. Sharpe
Federal Reserve Board - Research & Statistics
Board of Governors of the Federal Reserve - Division of International Finance (IFDP) - International Banking Section
June 6, 1996
Board of Governors of the Federal Reserve System Finance and Economics DiscussionSeries FEDS Paper Number 96-25
This paper establishes empirically that specialization in private-market corporate lending exists, adding a new dimension to the public vs. private debt distinctions now common in the literature on debt contracting and financial intermediation. Using a large database of individual loans, we compare lending by finance companies to that by banks. The evidence implies that it is intermediaries in general that are special in solving information problems, not banks in particular. But lending by the two types of institutions is not identical. Finance companies tend to serve observably riskier borrowers, especially highly leveraged borrowers, although banks and finance companies do compete across the spectrum of borrower risk. The evidence supports both regulatory and reputational explanations for this specialization and perhaps an explanation based on institutional differences in borrower monitoring and control. In passing, we shed light on various theories of debt contracting and intermediation and also present facts about finance companies, which have received little attention.
JEL Classification: G20, G32working papers series
Date posted: April 30, 1998
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