Abstract
Small and medium-sized firms often obtain capital via a mixture of relationship and arm’s-length bank lending. We show that such heterogeneous multiple bank financing leads to a lower probability of inefficient credit foreclosure than both monopoly relationship lending and homogeneous multiple bank financing. Yet, in order to reduce hold-up and coordination-failure risk, the relationship bank’s fraction of total firm debt must not become too large. For firms with intermediate expected profits, the probability of inefficient credit-renegotiation is shown to decrease along with the relationship bank’s information precision. For firms with extremely high or extremely low expected returns, however, it increases.
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Bannier, C.E. Heterogeneous multiple bank financing: does it reduce inefficient credit-renegotiation incidences?. Financ Mark Portfolio Manag 21, 445–470 (2007). https://doi.org/10.1007/s11408-007-0062-6
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DOI: https://doi.org/10.1007/s11408-007-0062-6