Do banks price their informational monopoly?

Theory suggests that banks’ private information lets them hold up borrowers for higher interest rates. Since new information about a firm is revealed at the time of its bond IPO, it follows that banks will be forced to adjust their loan interest rates downwards after firms undertake their bond IPO....

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Bibliographic Details
Published in:Journal of financial economics 2009-08, Vol.93 (2), p.185-206
Main Authors: Hale, Galina, Santos, João A.C.
Format: Article
Language:English
Subjects:
Bank loans
Bank relationships
Banking
Bond IPOs
Bond markets
Bond spreads
Bonds
Credit market
Credit rating
Credit ratings
Financial economics
Hypotheses
Information economics
Informational rents
Informational rents Loan spreads Bond IPOs Bond spreads Bank relationships
Initial public offerings
Interest rates
Loan spreads
Monopolies
Securities issues
Studies
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Summary:Theory suggests that banks’ private information lets them hold up borrowers for higher interest rates. Since new information about a firm is revealed at the time of its bond IPO, it follows that banks will be forced to adjust their loan interest rates downwards after firms undertake their bond IPO. We test this hypothesis and find that firms are able to borrow at lower interest rates after their bond IPO. Importantly, firms that get their first credit rating at the time of their bond IPO benefit from larger interest rate savings than those that already had a credit rating. These findings provide support for the hypothesis that banks price their informational monopoly. We also find that it is costly for firms to enter the public bond market.
ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2008.08.003