Life‐Cycle Patterns of Interest‐Rate Mark‐Ups in Small‐Firm Finance* |
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Authors: | Moshe Kim Eirik Gaard Kristiansen Bent Vale |
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Institution: | 1. University of Haifa, 31905 Haifa, Israel kim@econ.haifa.ac.il;2. Norwegian School of Economics, NO‐5045 Bergen, Norway eirik.kristiansen@nhh.no;3. Norges Bank (central bank of Norway), NO‐0107 Oslo, Norway bent.vale@norges‐bank.no |
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Abstract: | We derive empirical implications from a theoretical model of bank–borrower relationships. The interest‐rate mark‐ups of banks are predicted to follow a life‐cycle pattern over the age of the borrowing firms. Because of endogenous bank monitoring by competing banks, borrowing firms initially face a low mark‐up, and thereafter an increasing mark‐up as a result of informational lock‐in, until it falls for older firms when the lock‐in is resolved. By applying a large sample of predominantly small unlisted firms and a new measure of asymmetric information, we find that firms with significant asymmetric‐information problems have a more pronounced life‐cycle pattern of interest‐rate mark‐ups. Additionally, we examine the effects of concentrated banking markets on interest‐rate mark‐ups. The results indicate that the life cycle of mark‐ups is mainly driven by asymmetric‐information problems and not by concentration. However, we find evidence that bank market concentration matters for older firms ? 2 Correction added after online publication on 20th February 2012; the original text read ‘However, we find evidence that bank market concentration for older firms’, omitting the word ‘matters’.
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Keywords: | Asymmetric information banking competition loan‐pricing lock‐in G21 L15 |
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