Nonbank Lending

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

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

64 Pages Posted: 26 Jul 2018 Last revised: 2 Nov 2019

See all articles by Sergey Chernenko

Sergey Chernenko

Purdue University - Department of Management

Isil Erel

Ohio State University (OSU) - Department of Finance

Robert Prilmeier

Tulane University - A.B. Freeman School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: October 30, 2019

Abstract

We provide novel systematic evidence on the extent and terms of direct lending by nonbank financial institutions, and explore whether banks are still special in lending to informationally opaque firms. Analyzing hand-collected data for a random sample of publicly-traded middle-market firms during the 2010-2015 period, we show that nonbank lending is widespread, with 32% of all loans being extended by nonbanks. Nonbank borrowers are less profitable, more levered, and more volatile than bank borrowers. Firms with a small negative EBITDA are 34% more likely to borrow from a nonbank than firms with a small positive EBITDA. While nonbank lenders are less likely to monitor by including financial covenants, they are more likely to align incentives through the use of warrants. Controlling for firm and loan characteristics, nonbank loans carry 190 basis points higher interest rates. 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

Suggested Citation

Chernenko, Sergey and Erel, Isil and Prilmeier, Robert, Nonbank Lending (October 30, 2019). Fisher College of Business Working Paper No. 2018-03-013, Charles A. Dice Center Working Paper No. 2018-13, 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

Robert Prilmeier

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

7 McAlister Drive
New Orleans, LA 70118
United States

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