Information Sensitivity and the Scope of Financial Intermediation

51 Pages Posted: 20 Jul 2014

See all articles by Daniel Neuhann

Daniel Neuhann

University of Texas at Austin, McCombs School of Business

Farzad Saidi

Boston University - Questrom School of Business; Centre for Economic Policy Research (CEPR)

Date Written: December 3, 2013

Abstract

We present a model of financial intermediation in which bank scope determines a lender's incentives to acquire information about the nature of a firm's moral-hazard problem. In the model, the lender's informedness is crucial for offering optimal financing contracts. We characterize the efficiency gains from contracting with an informed lender in terms of the firm's fundamentals, and explore coordination failures in information acquisition by multiple banks with heterogenous monitoring technologies. We develop a notion of firm-level information sensitivity to generate predictions about the firm-level effects of increasing the scope of banking. Highly volatile firms that are simultaneously highly productive are best placed to realize efficiency gains from contracting with banks offering a wide array of financial services. We propose the stepwise repeal of the Glass-Steagall Act in the U.S. during the 1990s as a suitable experiment that varied the scope of banking. Our key prediction is in line with the empirical record from this period. We use our framework to generate further empirical predictions regarding the structure of bank syndicates and the relationship between volatility and size.

Keywords: universal banking, firm volatility, financial deregulation, loans, underwriting, financial markets, moral hazard, adverse selection

JEL Classification: D86, G20, G21

Suggested Citation

Neuhann, Daniel and Saidi, Farzad, Information Sensitivity and the Scope of Financial Intermediation (December 3, 2013). Available at SSRN: https://ssrn.com/abstract=2345722 or http://dx.doi.org/10.2139/ssrn.2345722

Daniel Neuhann (Contact Author)

University of Texas at Austin, McCombs School of Business ( email )

Austin, TX 78701
United States

Farzad Saidi

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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