Lars Norden

Bargaining power and information in SME lending

Small- and medium-sized enterprises (SMEs) are informationally opaque and bank dependent. In SME lending, banks largely rely on soft information, because the scale and scope of hard information are limited. We analyze whether and how hard and soft information affects the borrower’s bargaining power vis-à-vis its bank. We use the fact that, for a given credit rating, certain borrowers obtain better loan terms than others to define measures of relative bargaining power. Using SME loan data from the USA and Germany, we find that more favorable soft information (management skills and character) increases borrower bargaining power. We also show that more favorable soft than hard information improves borrower bargaining power. The results are not driven by manipulation or statistical limitations of the credit ratings. Our study suggests that soft information represents an important and direct determinant of borrower bargaining power, affecting the outcomes of the loan contracting process.

The Impact of Government Intervention in Banks on Corporate Borrowers’ Stock Returns

Moving into and out of a financial and banking crisis is likely to be associated with spillover effects from the banking sector to the corporate sector. We investigate whether and how government interventions in the U.S. banking sector influence the stock market performance of corporate borrowers during the financial crisis of 2007-2009. We measure firms’ exposures to government interventions with an intervention score that is based on combined information on the firms’ structure of bank relationships and their banks’ participation in government capital support programs. We find that government capital infusions in banks have a significantly positive impact on borrowing firms’ stock returns. The effect is more pronounced for riskier and bank-dependent firms and those that borrow from banks that are less capitalized and smaller. Our study highlights positive effects from government interventions during the crisis, documenting that an alleviation of financial shocks to banks has led to significantly positive valuation effects in the corporate sector.

Business credit information sharing and default risk of private firms.

We investigate whether and how business credit information sharing helps to better assess the default risk of private firms. Private firms represent an ideal testing ground because they are smaller, more informationally opaque, riskier, and more dependent on trade credit and bank loans than public firms. Based on a representative panel dataset that comprises private firms from all major industries, we find that business credit information sharing substantially improves the quality of default predictions. The improvement is stronger for older firms and those with limited liability, and depends on the sharing of firms’ payment history and the number of firms covered by the local credit bureau office. The value of soft business credit information is higher for smaller and less distant firms. Furthermore, in spatial and industry analyses we show that the higher the value of business credit information the lower the realized default rates. Our study highlights the channel through which business credit information sharing adds value and the factors that influence its strength. JEL classification: D82; G21; G32; G33

Conditional Accounting Conservatism and Bank Risk Taking

We investigate the effect of an exogenous change in loan loss provisioning rules on bank risk taking. To identify the effect we exploit that only banks with a high conditional accounting conservatism (CAC) in the pre-adoption period should respond to the change. We conduct a difference-in-differences analysis using a large sample of matched bank-firm data around the introduction of dynamic loan loss provisioning in Spain in 2000. The main result is that banks with a high CAC in the pre-adoption period significantly increased their risk taking in the post-adoption period. These banks lend significantly more to ex ante riskier borrowers, lend more to borrowers with lower accounting quality, and lend more to borrowers that exhibit higher loan growth. Our findings on bank risk taking are consistent with reduced screening and monitoring incentives and highlight unintended effects of the change in the loan loss provisioning rules.

Liberalization, Bank Governance, and Risk Taking

We study the effects of the interplay between deregulation and governance on risk taking in the financial industry. We consider a large natural experiment in Spain where the removal of regulatory geographic constraints for savings banks led to a nationwide expansion of these banks during the past two decades. Based on a unique data set that combines information on the geographic distribution of bank lending, matched lender-borrower financial statements, and borrower defaults, we find that the governance of savings banks significantly affects the way in which they expand their lending activities. In particular, political influence at these banks is associated with higher ex ante risk taking and higher ex post loan defaults. Our study highlights the broader implications of the impact of global deregulation and consolidation and their interaction with governance issues.

Substitution Effects in Private Debt: Evidence from SMEs

We investigate whether SMEs with demand for debt finance increase trade credit when they experience a negative shock to bank credit. We base our analysis on a large sample of SMEs from the five biggest EU countries. First, SMEs’ ability to substitute largely depends on their credit quality. Second, substitution decreases during the financial crisis of 2007-09. Third, high credit quality firms with intermediate financial constraints are the most likely to substitute. We confirm these results on a subsample with matched bank-firm data. The evidence suggests that substitution in private debt is more difficult than considered in prior research.

Do firms spread out bond maturity to manage their funding liquidity risk

We investigate whether and how firms manage their rollover risk by having a dispersed bond maturity structure (granularity). Granularity can be achieved or maintained by frequently issuing sets of bonds with different maturities. We find that firms with higher granularity have higher availability of financing, lower cost of financing, lower financial constraints and lower stock return volatility. The effects are stronger for firms that face higher rollover risk. The evidence suggests that spreading out bond maturities is an effective corporate policy to manage rollover risk.