The Journal of Finance

Does Credit Competition Affect Small‐Firm Finance?

Published: 05/07/2010   |   DOI: 10.1111/j.1540-6261.2010.01555.x

TARA RICE, PHILIP E. STRAHAN

While relaxation of geographical restrictions on bank expansion permitted banking organizations to expand across state lines, it allowed states to erect barriers to branch expansion. These differences in states' branching restrictions affect credit supply. In states more open to branching, small firms borrow at interest rates 80 to 100 basis points lower than firms operating in less open states. Firms in open states also are more likely to borrow from banks. Despite this evidence that interstate branch openness expands credit supply, we find no effect of variation in state restrictions on branching on the amount that small firms borrow.

Banks' Advantage in Hedging Liquidity Risk: Theory and Evidence from the Commercial Paper Market

Published: 03/09/2006   |   DOI: 10.1111/j.1540-6261.2006.00857.x

EVAN GATEV, PHILIP E. STRAHAN

Banks have a unique ability to hedge against market‐wide liquidity shocks. Deposit inflows provide funding for loan demand shocks that follow declines in market liquidity. Consequently, banks can insure firms against systematic declines in liquidity at lower cost than other institutions. We provide evidence that when liquidity dries up and commercial paper spreads widen, banks experience funding inflows. These flows allow banks to meet loan demand from borrowers drawing funds from commercial paper backup lines without running down their holdings of liquid assets. We also provide evidence that implicit government support for banks during crises explains these funding flows.

Finance as a Barrier to Entry: Bank Competition and Industry Structure in Local U.S. Markets

Published: 01/20/2006   |   DOI: 10.1111/j.1540-6261.2006.00841.x

NICOLA CETORELLI, PHILIP E. STRAHAN

This paper tests how competition in local U.S. banking markets affects the market structure of nonfinancial sectors. Theory offers competing hypotheses about how competition ought to influence firm entry and access to bank credit by mature firms. The empirical evidence, however, strongly supports the idea that in markets with concentrated banking, potential entrants face greater difficulty gaining access to credit than in markets in which banking is more competitive.

How Laws and Institutions Shape Financial Contracts: The Case of Bank Loans

Published: 11/28/2007   |   DOI: 10.1111/j.1540-6261.2007.01293.x

JUN QIAN, PHILIP E. STRAHAN

Legal and institutional differences shape the ownership and terms of bank loans across the world. We show that under strong creditor protection, loans have more concentrated ownership, longer maturities, and lower interest rates. Moreover, the impact of creditor rights on loans depends on borrower characteristics such as the size and tangibility of assets. Foreign banks appear especially sensitive to the legal and institutional environment, with their ownership declining relative to domestic banks as creditor protection falls. Our multidimensional empirical model paints a more complete picture of how financial contracts respond to the legal and institutional environment than existing studies.

Securitization and the Declining Impact of Bank Finance on Loan Supply: Evidence from Mortgage Originations

Published: 03/13/2009   |   DOI: 10.1111/j.1540-6261.2009.01451.x

ELENA LOUTSKINA, PHILIP E. STRAHAN

Low‐cost deposits and increased balance sheet liquidity raise banks' supply of illiquid loans more than loans easily sold or securitized. We exploit the inability of Fannie Mae and Freddie Mac to purchase jumbo mortgages to identify an exogenous change in liquidity. The volume of jumbo mortgage originations relative to nonjumbo originations increases with bank holdings of liquid assets and decreases with bank deposit costs. This result suggests that the increasing depth of the mortgage secondary market fostered by securitization has reduced the effect of lender's financial condition on credit supply.

Entrepreneurship and Bank Credit Availability

Published: 12/17/2002   |   DOI: 10.1111/1540-6261.00513

Sandra E. Black, Philip E. Strahan

The literature is divided on the expected effects of increased competition and consolidation in the financial sector on the supply of credit to relationship borrowers. This paper tests whether policy changes fostering competition and consolidation in U.S. banking helped or harmed entrepreneurs. We find that the rate of new incorporations increases following deregulation of branching restrictions, and that deregulation reduces the negative effect of concentration on new incorporations. We also find the formation of new incorporations increases as the share of small banks decreases, suggesting that diversification benefits of size outweigh the possible comparative advantage small banks may have in forging relationships.

Regulatory Incentives and the Thrift Crisis: Dividends, Mutual‐to‐Stock Conversions, and Financial Distress

Published: 09/01/1996   |   DOI: 10.1111/j.1540-6261.1996.tb04070.x

RANDALL S. KROSZNER, PHILIP E. STRAHAN

During the 1980s, insolvency of individual thrifts and the thrift deposit insurer created severe incentive problems. Lacking cash to close insolvent thrifts, regulators induced nearly $10 billion of private capital to flow into the industry through mutual‐to‐stock conversions. We test a theory of how regulators encouraged capital‐impaired mutual thrifts to convert by permitting them to pay dividends rather than rebuild capital. We estimate the costs of this policy and interpret the 1991 Federal Deposit Insurance Corporation Improvement Act as requiring regulators to impose restraints on depository institutions parallel to debt covenants that prevent capital distributions by nonfinancial firms experiencing distress.

Bank Quality, Judicial Efficiency, and Loan Repayment Delays in Italy

Published: 02/20/2020   |   DOI: 10.1111/jofi.12896

FABIO SCHIANTARELLI, MASSIMILIANO STACCHINI, PHILIP E. STRAHAN

Italian firms delay payment to banks weakened by past loan losses. Exploiting Credit Register data, we fully absorb borrower fundamentals with firm‐quarter effects. Identification therefore reflects firm choices to delay payment to some banks, depending on their health. This selective delay occurs more where legal enforcement of collateral recovery is slow. Poor enforcement encourages borrowers not to pay when the value of their bank relationship comes into doubt. Selective delays occur even by firms able to pay all lenders. Credit losses in Italy have thus been worsened by the combination of weak banks and weak legal enforcement.

Funding Liquidity without Banks: Evidence from a Shock to the Cost of Very Short‐Term Debt

Published: 07/06/2019   |   DOI: 10.1111/jofi.12832

FELIPE RESTREPO, LINA CARDONA‐SOSA, PHILIP E. STRAHAN

In 2011, Colombia instituted a tax on repayment of bank loans, which increased the cost of short‐term bank credit more than long‐term credit. Firms responded by cutting short‐term loans for liquidity management purposes and increasing the use of cash and trade credit. In industries in which trade credit is more accessible (based on U.S. Compustat firms), we find substitution into accounts payable and little effect on cash and investment. Where trade credit is less available, firms increase cash and cut investment. Thus, trade credit provides an alternative source of liquidity that can insulate some firms from bank liquidity shocks.

The Impact of Incentives and Communication Costs on Information Production and Use: Evidence from Bank Lending

Published: 02/06/2015   |   DOI: 10.1111/jofi.12251

JUN (QJ) QIAN, PHILIP E. STRAHAN, ZHISHU YANG

In 2002 and 2003, many Chinese banks implemented reforms that delegated authority to individual loan officers. The change followed China's entrance into the WTO and offers a plausibly exogenous shock to loan officer incentives to produce information. We find that the bank's internal risk rating becomes a stronger predictor of loan interest rates and ex post outcomes after reform. When the loan officer and the branch president who approves the loan work together longer, the rating also becomes more strongly related to loan prices and outcomes. Our results highlight how incentives and communication costs affect information production and use.

Are All Ratings Created Equal? The Impact of Issuer Size on the Pricing of Mortgage‐Backed Securities

Published: 11/19/2012   |   DOI: 10.1111/j.1540-6261.2012.01782.x

JIE (JACK) HE, JUN (QJ) QIAN, PHILIP E. STRAHAN

Initial yields on both AAA‐rated and non‐AAA rated mortgage‐backed security (MBS) tranches sold by large issuers are higher than yields on similar tranches sold by small issuers during the market boom years of 2004 to 2006. Moreover, the prices of MBS sold by large issuers drop more than those sold by small issuers, and the differences are concentrated among tranches issued during 2004 to 2006. These results suggest that investors price the risk that large issuers received more inflated ratings than small issuers, especially during boom periods.

Exporting Liquidity: Branch Banking and Financial Integration

Published: 02/03/2016   |   DOI: 10.1111/jofi.12387

ERIK P. GILJE, ELENA LOUTSKINA, PHILIP E. STRAHAN

Using exogenous liquidity windfalls from oil and natural gas shale discoveries, we demonstrate that bank branch networks help integrate U.S. lending markets. Banks exposed to shale booms enjoy liquidity inflows, which increase their capacity to originate and hold new loans. Exposed banks increase mortgage lending in nonboom counties, but only where they have branches and only for hard‐to‐securitize mortgages. Our findings suggest that contracting frictions limit the ability of arm's length finance to integrate credit markets fully. Branch networks continue to play an important role in financial integration, despite the development of securitization markets.