Commercial Lending Concentration and Bank Expertise: Evidence from Borrower Financial Statements

79 Pages Posted: 23 Sep 2015 Last revised: 24 May 2017

See all articles by Philip G. Berger

Philip G. Berger

University of Chicago - Booth School of Business

Michael Minnis

University of Chicago - Booth School of Business

Andrew Sutherland

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: May 22, 2017

Abstract

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

Berger, Philip G. and Minnis, Michael and Sutherland, Andrew, Commercial Lending Concentration and Bank Expertise: Evidence from Borrower Financial Statements (May 22, 2017). Chicago Booth Research Paper No. 15-42. Available at SSRN: https://ssrn.com/abstract=2663714 or http://dx.doi.org/10.2139/ssrn.2663714

Philip G. Berger

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-834-8687 (Phone)
773-834-4585 (Fax)

Michael Minnis (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

Andrew Sutherland

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street

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