Uncertainty and the Cost of Bank vs. Bond Finance

49 Pages Posted: 21 Feb 2019

See all articles by Christian Grimme

Christian Grimme

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute

Date Written: 2019

Abstract

How does uncertainty affect the costs of raising finance in the bond market and via bank loans? Empirically, this paper finds that heightened uncertainty is accompanied by an increase in corporate bond yields and a decrease in bank lending rates. This finding can be explained with a model that includes costly state verification and a special informational role for banks. To reduce uncertainty, banks acquire additional costly information about borrowers. More information increases the value of the lending relationship and lowers the lending rate. Bond investors demand compensation for the increased risk of firm default.

Keywords: uncertainty shocks, financial frictions, relationship banking, bank loan rate setting, information acquisition

JEL Classification: E320, E430, E440, G210

Suggested Citation

Grimme, Christian, Uncertainty and the Cost of Bank vs. Bond Finance (2019). Available at SSRN: https://ssrn.com/abstract=3338810 or http://dx.doi.org/10.2139/ssrn.3338810

Christian Grimme (Contact Author)

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute ( email )

Poschinger Str. 5
Munich, 01069
Germany

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