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Financial Markets and Portfolio Management

, Volume 21, Issue 4, pp 445–470 | Cite as

Heterogeneous multiple bank financing: does it reduce inefficient credit-renegotiation incidences?

  • Christina E. Bannier
Article

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.

Keywords

Relationship lending Asymmetric information Financial distress Hold-up Coordination failure 

JEL

D82 G21 L14 

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Copyright information

© Swiss Society for Financial Market Research 2007

Authors and Affiliations

  1. 1.Department of Banking and FinanceFrankfurt School of Finance and ManagementFrankfurtGermany

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