Charles A. Dice Center Working Paper No. 2018-13
58 Pages Posted: 26 Jul 2018
Date Written: July 25, 2018
We provide novel systematic evidence on the terms of direct lending by nonbank financial institutions. Analyzing hand-collected data for a random sample of publicly-traded middle-market firms during the 2010-2015 period, we find that nonbank lending is widespread, with 32% of all loans being extended by nonbanks. Nonbank borrowers are smaller, more R&D intensive, and significantly more likely to have negative EBITDA. Firms are also more likely to borrow from a nonbank lender if local banks are poorly capitalized and less concentrated. Nonbank lenders are less likely to monitor by including financial covenants in their loans, but appear to engage in more ex-ante screening. Controlling for firm and loan characteristics, nonbank loans carry about 200 basis points higher interest rates. Using fuzzy regression discontinuity design and matching techniques generates similar results. Overall, our results provide evidence of market segmentation in the commercial loan market, where bank and nonbank lenders utilize different lending techniques and cater to different types of borrowers.
Keywords: shadow banking, relationship lending, market segmentation
JEL Classification: G21, G23, G30, G32
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