Why Do Firms Borrow Directly from Nonbanks?
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
Date Written: March 7, 2022
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: Suggested Citation