Working Paper: CEPR ID: DP16142
Authors: Hans Degryse; Sotirios Kokas; Raoul Minetti
Abstract: We study the impact of different dimensions of banks' experience on the extent of banks' moral hazard in loan markets. Using rich U.S. corporate loan-level data, we find that banks' prior experience with borrowers and co-lenders reinforces their monitoring incentives. Banks' sectoral experience, in contrast, appears to dilute monitoring incentives, calling for a larger lead share in the lending syndicate. In cross-sectional tests, we unpack experience into different dimensions and study to what extent the various components of lenders' experience improve credit market outcomes. The key to our identification strategy is that we exploit variation in experience for the same bank at a given point in time across firms, sectors and other banks. In addition, bank mergers are used as an instrument to identify exogenous shocks to the stock of bank's experience.
Keywords: experience; relationship lending; MAS; syndicated loans
JEL Codes: G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| banks' prior experience with borrowers and co-lenders (G21) | moral hazard (G52) |
| increased firm experience (L25) | moral hazard (G52) |
| increased bank experience (G21) | moral hazard (G52) |
| sectoral experience (L89) | lead share (Y60) |
| sectoral experience (L89) | moral hazard (G52) |
| greater sectoral experience (L80) | dilution of monitoring incentives (M52) |
| greater sectoral experience (L80) | complacency among lenders (G21) |