On the Non-Exclusivity of Loan Contracts: An Empirical Investigation

49 Pages Posted: 27 Mar 2012 Last revised: 20 Mar 2015

See all articles by Hans Degryse

Hans Degryse

KU Leuven, Department Accounting, Finance and Insurance; Centre for Economic Policy Research (CEPR)

Vasso Ioannidou

Lancaster University - Management School; Centre for Economic Policy Research (CEPR)

Erik L. von Schedvin

Sveriges Riksbank

Multiple version iconThere are 4 versions of this paper

Date Written: March 12, 2015

Abstract

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

Degryse, Hans and Ioannidou, Vasso and von Schedvin, Erik L., On the Non-Exclusivity of Loan Contracts: An Empirical Investigation (March 12, 2015). Available at SSRN: https://ssrn.com/abstract=2028933 or http://dx.doi.org/10.2139/ssrn.2028933

Hans Degryse (Contact Author)

KU Leuven, Department Accounting, Finance and Insurance ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Vasso Ioannidou

Lancaster University - Management School ( email )

Bailrigg
Lancaster, LA1 4YX
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Erik L. Von Schedvin

Sveriges Riksbank ( email )

Brunkebergstorg 11
SE-103 37 Stockholm
Sweden

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