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

49 Pages Posted: 15 May 2008 Last revised: 17 Mar 2009

See all articles by Kenneth N. Daniels

Kenneth N. Daniels

Daniels Foundation for Impact Investments and Development

Gabriel G. Ramirez

Kennesaw State University - Michael J. Coles College of Business

Date Written: Vol 34, Number 1 Aug, 2008

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

Suggested Citation

Daniels, Kenneth N. and Ramirez, Gabriel G., Information, Credit Risk, Lending Specialization, and Loan Pricing: Evidence from the DIP Financing Market (Vol 34, Number 1 Aug, 2008). Journal of Financial Services Research, Vol 34, Number 1, August 2008, Available at SSRN: https://ssrn.com/abstract=1133522

Kenneth N. Daniels

Daniels Foundation for Impact Investments and Development ( email )

New Jersey, NJ 07018
United States

Gabriel G. Ramirez (Contact Author)

Kennesaw State University - Michael J. Coles College of Business ( email )

1000 Chastain Road
Kennesaw, GA 30144
United States
770-423-6181 (Phone)

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