Why Do Firms Switch Banks?

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

working papers series