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Product Market Peers in Lending: Information Processing Efficiencies and Proprietary Costs

54 Pages Posted: 16 Jan 2013 Last revised: 10 Nov 2016

Gus De Franco

Tulane University - A.B. Freeman School of Business

Alexander Edwards

University of Toronto - Rotman School of Management

Scott Liao

University of Toronto - Rotman School of Management

Date Written: November 7, 2016

Abstract

This study examines how product market peers affect lending relationships. We contend that firms are more likely to borrow from a bank that has previously lent to a peer, to mitigate information asymmetry with the bank when potential information processing efficiencies are greater (i.e., information efficiency hypothesis), but there will be a decreased propensity to borrow from a shared lender when the costs of leaking proprietary information are greater (i.e., proprietary information leakage hypothesis). We find that, on average, firms avoid borrowing from banks that lend to a product market peer. We also document evidence consistent with both hypotheses in both cross-sectional and difference-in-difference research designs. In additional analysis, we examine the pricing of loans and observe loan pricing effects consistent with these two hypotheses.

Keywords: Lender Choice, Information Asymmetry, Proprietary Information

Suggested Citation

De Franco, Gus and Edwards, Alexander and Liao, Scott, Product Market Peers in Lending: Information Processing Efficiencies and Proprietary Costs (November 7, 2016). Available at SSRN: https://ssrn.com/abstract=2200995 or http://dx.doi.org/10.2139/ssrn.2200995

Gus De Franco

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

Alexander Edwards (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Wei-Yi (Scott) Liao

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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