Why Do Firms Switch Banks?

Abstract:     
Using 30,466 bank loan deals originated during 1990-2005, we examine why firms switch to new banks for their repeat loans instead of staying with their relationship banks. Employing a variety of measures to proxy for firms' informational transparency, we find that the soft information hypothesis, which states that informationally opaque firms are less likely to switch banks, does not hold uniformly across the information spectrum; the most opaque firms and the most transparent firms in our sample are least likely to switch banks. Further, firms that switch banks are more likely to switch from small banks to large banks, and from small bank markets to large bank markets. We also find that firms obtain higher loan amounts, undertake higher capital expenditure, and experience an increase in leverage after they switch to a new bank. Overall our findings are supportive of the graduation hypothesis which states that firms are more likely to switch to larger banks to better meet their growing need for credit.

Number of Pages in PDF File: 48

Keywords: Banking relationships, borrowing constraints, soft information

JEL Classification: G21, G24, G34

working papers series