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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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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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container_end_page	206
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container_start_page	185
container_title	Journal of financial economics
container_volume	93
creator	Hale, Galina Santos, João A.C.
description	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.
doi_str_mv	10.1016/j.jfineco.2008.08.003
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source	International Bibliography of the Social Sciences (IBSS); Elsevier
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
title	Do banks price their informational monopoly?
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