Abstract

http://ssrn.com/abstract=966571
 
 

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Why Do Firms Switch Banks?


Radhakrishnan Gopalan


Washington University in Saint Louis - John M. Olin Business School

Gregory F. Udell


Indiana University - Department of Finance

Vijay Yerramilli


University of Houston, C. T. Bauer College of Business

March 2007

EFA 2007 Ljubljana Meetings Paper

Abstract:     
Using 30,466 bank loans originated during 1990-2006, we examine why firms switch to new banks for their repeat loans. Employing a variety of measures to proxy for firm-level asymmetric information, we find a non-monotonic relationship between the extent of information asymmetry and a firm's propensity to switch to a new bank - the most opaque firms and the most transparent firms are more likely to stay with their existing relationship bank. Further, firms that switch banks are more likely to switch from small banks to large banks, from small bank markets to large bank markets. After controlling for the endogeneity of the decision to switch, we find that firms obtain higher loan amounts when they switch to a new bank. Thus, overall, our findings suggest that firms form new banking relationships when their information environment improves and that new relationships enable firms to overcome borrowing constraints at their existing relationship bank.

Number of Pages in PDF File: 43

Keywords: Banking relationships, information asymmetry

JEL Classification: G21, G30, G32

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Date posted: March 2, 2007  

Suggested Citation

Gopalan, Radhakrishnan and Udell, Gregory F. and Yerramilli, Vijay, Why Do Firms Switch Banks? (March 2007). EFA 2007 Ljubljana Meetings Paper. Available at SSRN: http://ssrn.com/abstract=966571 or http://dx.doi.org/10.2139/ssrn.966571

Contact Information

Radhakrishnan Gopalan (Contact Author)
Washington University in Saint Louis - John M. Olin Business School ( email )
One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
Gregory F. Udell
Indiana University - Department of Finance ( email )
1309 E. 10th St.
Bloomington, IN 47405
United States
Vijay Yerramilli
University of Houston, C. T. Bauer College of Business ( email )
Houston, TX 77204
United States
713-743-2516 (Phone)
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