Benefits Of Credit From Multiple Lenders

1148 Words Sep 30th, 2015 5 Pages
Bolton and Scharfstein (1996) found that borrowing from multiple lenders may be advantageous, especially for the less risky firms, they also show that when firms default as they either cannot pay back the debt or their managers want to transfer cash for themselves. Although borrowing from a single bank can eliminate the information disclosure that occurs when the firm borrows from multiple banks, it results in the firm’s competitors to infer that the firm is hiding information and react accordingly (Yosha, 1995). Detragiache et al (2000) provide a basic principle for a firm to look for multiple lenders by considering the cost incurred when it is denied credit by its bank for reasons. As an illustration, a temporary liquidity shortage leads the bank to be forced to deny credit even to its loyal borrowers. Hence, given these possibility and risk of not being able to raise funding from an alternative bank for the first time, it may be worth to initiate and maintain multiple lending relationships despite the costs is needed.

A number of researches state that firm size, firm’s quality and loan quality have important effects on the number of bank relationship (Petersen and Rajan, 1994; Ongena and Smith, 2000; Detragiach et al, 2000). Banks diversify the risk by reducing their loan exposure to individual enterprises and widen the loan portfolio to more firms. Large firms usually require an extensive banking relationship in order to meet firm specific needs, which are more…
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