Why Do Firms Borrow Directly from Nonbanks?
Charles A. Dice Center Working Paper No. 2018-13
53 Pages Posted: 26 Jul 2018 Last revised: 17 Aug 2020
Date Written: August 13, 2020
Analyzing hand-collected credit agreements data for a random sample of middle-market firms during 2010-2015, we find that a third of all loans is extended directly by nonbank financial intermediaries. Nonbanks lend to less profitable and more levered firms that undergo larger changes in size around loan origination. The probability of borrowing from a nonbank jumps by 34% as EBITDA falls below zero, an effect that is largely due to bank regulation. Controlling for firm and loan characteristics, nonbank loans carry 190 basis points higher interest rates, suggesting that access to funding, rather than prices, is why firms borrow from nonbanks.
Keywords: shadow banking, relationship lending, market segmentation
JEL Classification: G21, G23, G30, G32
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