Keywords: Private debt, bank loan, finance company
Abstract: This paper establishes empirically that
specialization in private-market corporate lending exists, adding a
new dimension to the public vs. private debt distinctions now common
in the literature on debt contracting and financial intermediation.
Using a large database of individual loans, we compare lending by
finance companies to that by banks. The evidence implies that it is
intermediaries in general that are special in solving information
problems, not banks in particular. But lending by the two types of
institutions is not identical. Finance companies tend to serve
observably riskier borrowers, especially highly leveraged borrowers,
although banks and finance companies do compete across the spectrum of
borrower risk. The evidence supports both regulatory and reputational
explanations for this specialization and perhaps an explanation based
on institutional differences in borrower monitoring and control. In
passing, we shed light on various theories of debt contracting and
intermediation and also present facts about finance companies, which
have received little attention.
Full paper (467 KB PDF)
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