Abstract

http://ssrn.com/abstract=972071
 
 

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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 - Kelley School of Business - Department of Finance

Vijay Yerramilli


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

November 29, 2007

AFA 2008 New Orleans Meetings Paper

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

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Date posted: March 23, 2007 ; Last revised: May 14, 2014

Suggested Citation

Gopalan, Radhakrishnan and Udell, Gregory F. and Yerramilli, Vijay, Why Do Firms Switch Banks? (November 29, 2007). AFA 2008 New Orleans Meetings Paper. Available at SSRN: http://ssrn.com/abstract=972071 or http://dx.doi.org/10.2139/ssrn.972071

Contact Information

Radhakrishnan Gopalan
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 - Kelley School of Business - Department of Finance ( email )
1309 E. 10th St.
Bloomington, IN 47405
United States

Vijay Yerramilli (Contact Author)
University of Houston, C. T. Bauer College of Business ( email )
Houston, TX 77204
United States
713-743-2516 (Phone)
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