Information, Credit Risk, Lending Specialization, and Loan Pricing: Evidence from the DIP Financing Market

Abstract

We provide an empirical support for theories of lender specialization using the recently developed market for Debtor-in-Possession (DIP) financing. The legal environment in which DIP financing operates represents a natural laboratory for testing determinants of lending specialization (e.g. lender choice). We find that the choice of lender is not driven by credit risk, but by information considerations and that this lending specialization has loan pricing effects. In short, banks (non-bank lenders) lend to more (less) transparent firms and at lower (higher) loan spreads. Our results are consistent with the interpretation that banks provide important and useful services.

Keywords: Bank loans, financial intermediation, debtor in possession financing, loan contracting, lending specialization, loan pricing, information effects, credit risk, and chapter 11.

JEL Classification: G21, G33