Why Do Firms Borrow Directly from Nonbanks?

Fisher College of Business Working Paper No. 2018-03-013

Charles A. Dice Center Working Paper No. 2018-13

Review of Financial Studies, forthcoming

65 Pages Posted: 26 Jul 2018 Last revised: 9 Mar 2022

See all articles by Sergey Chernenko

Sergey Chernenko

Purdue University - Department of Management

Isil Erel

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Robert Prilmeier

Tulane University - A.B. Freeman School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: March 7, 2022

Abstract

Analyzing hand-collected credit agreements for a sample of middle-market firms over 2010–2015, we find that one-third of all loans are directly extended by nonbank financial intermediaries. Two thirds of such nonbank lending can be attributed to bank regulations that constrain banks’ ability to lend to unprofitable and highly levered borrowers. Firms with negative EBITDA and debt/EBITDA greater than six are 32% and 15% more likely to borrow from nonbanks. These firms pay significantly higher interest rates, especially following the 2013 leveraged loan guidance revisions. Nonbank borrowers also receive different nonprice terms compared to firms borrowing from banks.

Keywords: bank regulation, shadow banking, market segmentation, relationship lending

JEL Classification: G21, G23, G30, G32

Suggested Citation

Chernenko, Sergey and Erel, Isil and Prilmeier, Robert, Why Do Firms Borrow Directly from Nonbanks? (March 7, 2022). Fisher College of Business Working Paper No. 2018-03-013, Charles A. Dice Center Working Paper No. 2018-13, Review of Financial Studies, forthcoming, Available at SSRN: https://ssrn.com/abstract=3220527 or http://dx.doi.org/10.2139/ssrn.3220527

Sergey Chernenko

Purdue University - Department of Management ( email )

West Lafayette, IN 47907-1310
United States
(765) 494-4413 (Phone)

HOME PAGE: http://https://sites.google.com/site/chernenkosergey/

Isil Erel (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Robert Prilmeier

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

7 McAlister Drive
New Orleans, LA 70118
United States

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