On the Non-Exclusivity of Loan Contracts: An Empirical Investigation
CentER Discussion Paper Series No. 2011-130
49 Pages Posted: 30 Nov 2011 Last revised: 20 Mar 2015
Date Written: March 12, 2015
We study how a bank’s willingness to lend to a previously exclusive firm changes once the firm obtains a loan from another bank (“outside loan”) and breaks an exclusive relationship. Using a difference-in-difference analysis and a setting where outside loans are observable, we document that an outside loan triggers a decrease in the initial bank’s willingness to lend to the firm i.e., outside loans are strategic substitutes. Consistent with concerns about co-ordination problems and higher indebtedness, we find that this reaction is more pronounced the larger the outside loan and it is muted if the initial bank’s existing and future loans retain seniority and are protected with valuable collateral. Our results give a benevolent role to transparency enabling banks to mitigate adverse effects from outside loans. The resulting substitute behavior may also act as a stabilizing force in credit markets limiting positive co-movements between lenders, decreasing the possibility of credit freezes and financial crises.
Keywords: co-ordination failures, credit freezes, credit rationing, credit supply, debt seniority, floating charge, negative externalities, non-exclusivity, transparency
JEL Classification: G21, G34, L13, L14
Suggested Citation: Suggested Citation