Commercial Lending Concentration and Bank Expertise: Evidence from Borrower Financial Statements
79 Pages Posted: 23 Sep 2015 Last revised: 24 May 2017
Date Written: May 22, 2017
Lending concentration features prominently in models of information acquisition by banks, but empirical evidence on its role is limited because banks rarely disclose details about their exposures or information collection. Using a dataset of bank-level commercial loan exposures, we find banks are less likely to collect audited financial statements from firms in industries and regions in which they have more exposure. These findings are stronger in settings in which adverse selection is acute and muted when the bank lacks experience with an exposure. Our results offer novel evidence on how bank characteristics are related to the type of financial information they use and support theoretical predictions suggesting portfolio concentration reveals a bank’s relative expertise.
Keywords: commercial lending, monitoring, information economics, lending concentration, financial statements, bank regulation, auditing, hard and soft information, theory of the firm
JEL Classification: G21, G38, M40, D82, L14
Suggested Citation: Suggested Citation