Do Banks Price Their Informational Monopoly?

Posted: 26 Sep 2009  

Galina Hale

Federal Reserve Bank of San Francisco

João A. C. Santos

Federal Reserve Bank of New York

Multiple version iconThere are 2 versions of this paper

Date Written: September 24, 2009

Abstract

Theory suggests that banks' private information lets them hold up borrowers for higher interest rates. Since new information about a firm is revealed at the time of its bond IPO, it follows that banks will be forced to adjust their loan interest rates downwards after firms undertake their bond IPO. We test this hypothesis and find that firms are able to borrow at lower interest rates after their bond IPO. Importantly, firms that get their first credit rating at the time of their bond IPO benefit from larger interest rate savings than those that already had a credit rating. These findings provide support for the hypothesis that banks price their informational monopoly. We also find that it is costly for firms to enter the public bond market.

Keywords: informational rents, loan spreads, Bond IPOs, bond spreads, bank relationships

JEL Classification: G24, G32

Suggested Citation

Hale, Galina and Santos, João A. C., Do Banks Price Their Informational Monopoly? (September 24, 2009). Journal of Financial Economics (JFE), Vol. 93, 2009. Available at SSRN: https://ssrn.com/abstract=1478016

Galina Hale

Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States
415-974-3131 (Phone)
415-974-2168 (Fax)

HOME PAGE: http://www.frbsf.org/economic-research/economists/galina-hale/

João A. C. Santos (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-5583 (Phone)
212-720-8363 (Fax)

HOME PAGE: HTTP://WWW.NEWYORKFED.ORG/RMAGHOME/ECONOMIST/SANTOS/CONTACT.HTML

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