Why Do Firms Switch Banks?

43 Pages Posted: 2 Mar 2007

See all articles by Radhakrishnan Gopalan

Radhakrishnan Gopalan

Washington University in St. Louis - John M. Olin Business School

Gregory F. Udell

Indiana University - Kelley School of Business - Department of Finance

Vijay Yerramilli

University of Houston, C. T. Bauer College of Business

Multiple version iconThere are 2 versions of this paper

Date Written: March 2007

Abstract

Using 30,466 bank loans originated during 1990-2006, we examine why firms switch to new banks for their repeat loans. Employing a variety of measures to proxy for firm-level asymmetric information, we find a non-monotonic relationship between the extent of information asymmetry and a firm's propensity to switch to a new bank - the most opaque firms and the most transparent firms are more likely to stay with their existing relationship bank. Further, firms that switch banks are more likely to switch from small banks to large banks, from small bank markets to large bank markets. After controlling for the endogeneity of the decision to switch, we find that firms obtain higher loan amounts when they switch to a new bank. Thus, overall, our findings suggest that firms form new banking relationships when their information environment improves and that new relationships enable firms to overcome borrowing constraints at their existing relationship bank.

Keywords: Banking relationships, information asymmetry

JEL Classification: G21, G30, G32

Suggested Citation

Gopalan, Radhakrishnan and Udell, Gregory F. and Yerramilli, Vijay, Why Do Firms Switch Banks? (March 2007). EFA 2007 Ljubljana Meetings Paper. Available at SSRN: https://ssrn.com/abstract=966571 or http://dx.doi.org/10.2139/ssrn.966571

Radhakrishnan Gopalan (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Gregory F. Udell

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

Vijay Yerramilli

University of Houston, C. T. Bauer College of Business ( email )

Houston, TX 77204
United States
713-743-2516 (Phone)

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