Inter-Market Competition and Bank Loan Spreads: Evidence from The Securities Offering Reform

30 Pages Posted: 23 Aug 2011 Last revised: 26 Nov 2013

Matthew Gustafson

Pennsylvania State University - Smeal College of Business

Date Written: November 1, 2013

Abstract

I provide evidence of a new mechanism by which access to public securities mitigates the bank hold-up problem and reduces loan spreads – it increases a borrower’s bargaining power vis-à-vis a lender by offering a bank loan substitute. Difference-in-differences results indicate that loan spreads are sensitive to legislation that makes public securities more attractive. The post-legislation spread reduction is largest for the bank borrowers that benefit most from the legislation. Importantly, the effect is concentrated in credit-rated borrowers taking out term loans and borrowers returning to the bank lending market quickly. Thus, the availability of public securities reduces loan spreads for established borrowers only when it offers a financing substitute and the hold-up problem is severe.

Keywords: Bank Loans, Bank Competition, Banking Relationships, Public Debt Market, Shelf Registrations

Suggested Citation

Gustafson, Matthew, Inter-Market Competition and Bank Loan Spreads: Evidence from The Securities Offering Reform (November 1, 2013). 24th Australasian Finance and Banking Conference 2011 Paper. Available at SSRN: https://ssrn.com/abstract=1914867 or http://dx.doi.org/10.2139/ssrn.1914867

Matthew Gustafson (Contact Author)

Pennsylvania State University - Smeal College of Business ( email )

East Park Avenue
University Park, PA 16802
United States

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