Evergreening

68 Pages Posted: 28 Oct 2021 Last revised: 28 Jan 2023

See all articles by Miguel Faria-e-Castro

Miguel Faria-e-Castro

Federal Reserve Bank of St. Louis

Pascal Paul

Federal Reserve Bank of San Francisco

Juan M. Sánchez

Federal Reserve Banks - Federal Reserve Bank of St. Louis; Federal Reserve Banks - Federal Reserve Bank of St. Louis

Date Written: October, 2021

Abstract

We develop a simple model of relationship lending where lenders have incentives for evergreening loans by offering better terms to firms that are close to default. We detect such lending behavior using loan-level supervisory data for the United States. Banks that own a larger share of a firm's debt provide distressed firms with relatively more credit at lower interest rates. Building on this empirical validation, we incorporate the theoretical mechanism into a dynamic heterogeneous-firm model to show that evergreening affects aggregate outcomes, resulting in lower interest rates, higher levels of debt, and lower productivity.

Keywords: evergreening, zombie firms, bank lending, misallocation

JEL Classification: E43, E44, E60, G21, G32

Suggested Citation

Faria-e-Castro, Miguel and Paul, Pascal and Sanchez, Juan M. and Sanchez, Juan M., Evergreening (October, 2021). FRB St. Louis Working Paper No. 2021-12, Available at SSRN: https://ssrn.com/abstract=3951635 or http://dx.doi.org/10.20955/wp.2021.012

Miguel Faria-e-Castro (Contact Author)

Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

Pascal Paul

Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States

HOME PAGE: http://www.pascalpaul.de/

Juan M. Sanchez

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

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