"But a speci…c borrower's "promise" is not as good as that by another borrower and there may be no objective way to determine the likelihood that the "promise" will be kept. Moral hazard and adverse selection a¤ect the likelihood of loan repayment whence asymmetric information and incentive (principal-agent) problems may lead credit rationing to persist in equilibrium (Ja¤ee and Russell, 1976; Stiglitz and Weiss, 1981). Banks, through adequate screening and monitoring procedures, can overcome asymmetric information and incentive problems and reduce …rms'credit constraints (Diamond, 1984; Rajan, 1992; Bhattacharya and Thakor, 1993). "
[Show abstract][Hide abstract] ABSTRACT: This paper tests the impact of an imperfect firm-bank type match on firms' financial constraints using a dataset of about 4,500 Italian manufacturing firms. Considering an optimal match of opaque (transparent) borrowing firms with relational (transactional) lending main banks, the possibility arises of firm-bank "odd couples" where opaque firms end up matched with transactional main banks. We show that the probability of credit rationing increases when the mismatch between firms and banks widens. Our conjecture is that "odd couples" emerge either because of organizational changes in the credit market or since firms observe only imperfectly banks' lending technology.
Journal of Financial Intermediation 04/2015; 24(2):231-251. · 1.81 Impact Factor
"Rationing can take the two forms of (i) loan size rationing, which means that, at the current interest rate, all borrowers are served but demand a larger loan amount than they finally receive from the bank and (ii) borrower rationing, which means that some borrowers get no loan at all although they may have profitable investment projects and are indistinguishable from those borrowers who receive loans (Keeton (1979)). Jaffee and Russell (1976) establish loan size rationing in a model in which borrowers differ in their probability of default in the sense that some borrowers are honest and repay whenever they are able to while other borrowers are dishonest experiencing a utility increase from defaulting and do so whenever the costs of default are lower than the contracted repayment. In the model of Parker (2003) adverse selection and thus borrower rationing occurs because borrowers differ in their ability. "
[Show abstract][Hide abstract] ABSTRACT: I study credit rationing in small business bank relationships by using a unique data set of matched loan application and loan contract information. This data set establishes the degree of credit rationing by relating a business’s requested loan amount to the bank’s granted amount. In line with theoretical predictions, credit rationing is higher for opaque than transparent businesses at the beginning of their bank relationships but decreases over time for both. After testing for several alternative rationales, the results suggest that information and incentive problems explain the observed credit rationing and its dynamics.
"The hypotheses we take to the data are based on standard models of investment with financing frictions (cf. Jaffee and Russell, 1976; Stiglitz and Weiss, 1981; Holmstrom and Tirole, 1997). In theory, negative shocks to the supply of external finance, together with the presence of financing frictions, might hamper investment if firms lack sufficient financial slack to fund all profitable investment opportunities internally. "
[Show abstract][Hide abstract] ABSTRACT: We study the effect of the recent financial crisis on corporate investment. The crisis represents an unexplored negative shock to the supply of external finance for non-financial firms. Corporate investment declines significantly following the onset of the crisis, controlling for firm fixed effects and time-varying measures of investment opportunities. Consistent with a causal effect of a supply shock, the decline is greatest for firms that have low cash reserves or high net short-term debt, are financially constrained, or operate in industries dependent on external finance. To address endogeneity concerns, we measure firms' financial positions as much as four years prior to the crisis, and confirm that similar results do not follow placebo crises in the summers of 2003-2006. Nor do similar results follow the negative demand shock caused by September 11, 2001. The effects weaken considerably beginning in the third quarter of 2008, when the demand-side effects of the crisis became apparent. Additional analysis suggests an important precautionary savings motive for seemingly excess cash that is generally overlooked in the literature.
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