Adverse Selection in Corporate Loan Markets

60 Pages Posted: 1 Dec 2020 Last revised: 24 Jul 2023

See all articles by Mehdi Beyhaghi

Mehdi Beyhaghi

Board of Governors of the Federal Reserve System

Cesare Fracassi

University of Texas at Austin

Gregory Weitzner

McGill University

Date Written: July 20, 2023

Abstract

When reviewing bank mergers for antitrust, regulators typically argue that higher market concentration leads to higher prices. However, in loan markets, adverse selection can create a negative relationship between market concentration and prices. Using supervisory data, we show that interest rates and banks’ private risk assessments are higher in markets with more banks. We also create a measure of markup that is orthogonal to borrower risk and show that markups are higher in markets with more banks and after repeated borrowing relationships. We provide causal support for the adverse selection channel by using a shock to large banks’ lending capacities.

Keywords: bank loans, adverse selection, market power

JEL Classification: G21, G28, L13, L44, G32

Suggested Citation

Beyhaghi, Mehdi and Fracassi, Cesare and Weitzner, Gregory, Adverse Selection in Corporate Loan Markets (July 20, 2023). Available at SSRN: https://ssrn.com/abstract=3733932 or http://dx.doi.org/10.2139/ssrn.3733932

Mehdi Beyhaghi

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Cesare Fracassi

University of Texas at Austin ( email )

McCombs School of Business
2110 Speedway Stop B6600
Austin, TX 78712-1276
United States
512-232-6843 (Phone)

HOME PAGE: http://https://faculty.mccombs.utexas.edu/cesare.fracassi/

Gregory Weitzner (Contact Author)

McGill University ( email )

1001 Sherbrooke St. W
Montreal, Quebec H3A 1G5
Canada

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
519
Abstract Views
2,418
Rank
105,946
PlumX Metrics