Multiple but Asymmetric Bank Financing: The Case of Relationship Lending
Empirical evidence suggests that even those firms presumably most in need of monitoring-intensive financing (young, small, and innovative firms) have a multitude of bank lenders, where one may be special in the sense of relationship lending. However, theory does not tell us a lot about the economic rationale for relationship lending in the context of multiple bank financing. To fill this gap, we analyze the optimal debt structure in a model that allows for multiple but asymmetric bank financing. The optimal debt structure balances the risk of lender coordination failure from multiple lending and the bargaining power of a pivotal relationship bank. We show that firms with los expected cash-flows or high asset specificity prefer asymmetric financing, while firms with high expected cash-flow or high asset specificity tend to finance without relationship bank.
Classification: G21, G33, G78
Keywords: relationship lending, multiple bank financing, lender coordination