Credit Market Concentration, Relationship Lending and the Cost of Debt
38 Pages Posted: 11 Mar 2016
Date Written: February 21, 2016
We investigate how the banking industry concentration and the strength of credit relationships (relationship lending) jointly affect the cost of borrowing of firms. Our results indicate that relationship lending is not associated with the rent extraction mechanism deriving from informational lock-in. Conversely, market concentration appears to be associated with firms’ higher cost of funding. But the effect is fully compensated if the relationship between the firm and the bank is long and comprehensive. Controlling for a number of covariates and for endogeneity concerns leaves results unchanged. Our results shed some new light on the unclear effects documented by Kysucky and Norden (2016) of relationship lending on the cost of financing.
Keywords: relationship lending, credit market concentration, SMEs financing, instrumental variable estimation.
JEL Classification: G32, G30
Suggested Citation: Suggested Citation