Banking on Experience

57 Pages Posted: 11 May 2021 Last revised: 13 Jan 2022

See all articles by Hans Degryse

Hans Degryse

KU Leuven - Faculty of Business and Economics (FEB)

Sotirios Kokas

University of Essex - Essex Business School

Raoul Minetti

Michigan State University

Multiple version iconThere are 2 versions of this paper

Date Written: May 11, 2021

Abstract

Does bank experience reduce moral hazard in credit markets? Using U.S. corporate loan-level data, we find that, while experience with borrowers and co-lenders reinforces banks’ monitoring incentives, sector experience dilutes them, calling for larger involvement in lending syndicates. In cross-sectional tests, we dissect scenarios in which experience ameliorates lending outcomes. We interpret our findings through a loan syndication model in which experience eases monitoring, but sector experience raises salvage values after loan defaults. To attain identification, we exploit variation in experience at a point in time across firms, sectors, and co-lenders, and use bank mergers as instruments for bank experience.

Keywords: Banks, Experience, Moral Hazard, Sector Specialization, Relationship Lending

JEL Classification: G21, D8

Suggested Citation

Degryse, Hans and Kokas, Sotirios and Minetti, Raoul, Banking on Experience (May 11, 2021). Available at SSRN: https://ssrn.com/abstract=3843503 or http://dx.doi.org/10.2139/ssrn.3843503

Hans Degryse

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Sotirios Kokas (Contact Author)

University of Essex - Essex Business School ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

Raoul Minetti

Michigan State University ( email )

Agriculture Hall
East Lansing, MI 48824-1122
United States

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