Bank Loans, Bonds, and Information Monopolies across the Business Cycle

João A.C. Santos, Andrew Winton

Research output: Contribution to journalArticle

112 Scopus citations

Abstract

Theory suggests that banks' private information about borrowers lets them hold up borrowers for higher interest rates. Since hold-up power increases with borrower risk, banks with exploitable information should be able to raise their rates in recessions by more than is justified by borrower risk alone. We test this hypothesis by comparing the pricing of loans for bank-dependent borrowers with the pricing of loans for borrowers with access to public debt markets, controlling for risk factors. Loan spreads rise in recessions, but firms with public debt market access pay lower spreads and their spreads rise significantly less in recessions.

Original languageEnglish (US)
Pages (from-to)1315-1359
Number of pages45
JournalJournal of Finance
Volume63
Issue number3
DOIs
StatePublished - Jan 1 2008

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