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How Do Firms Choose Their Lenders? An Empirical Investigation

Paper:ewp-fin/9803007
From: Patt Bagdon <   > 
Date: Mon, 30 Mar 1998 12:31:00 -0800

Title: How Do Firms Choose Their Lenders? An Empirical Investigation
Author: Miguel Cantillo (University of California, Berkeley) and Julian Wright (University of Canterbury, New Zealand)
Contact:
Comments: approx 40 pages
JEL: G20, G31, G32, E44,
EWP References: none
Report-no: (Research Program in Finance, University of California, Berkeley Working Paper Series) IBER-CalBerk RPF-256-Rev

Abstract:

Abstract: This article investigates which firms borrow directly from the capital markets and which raise funds through intermediaries. Our empirical results show that large companies with abundant cash and collateral tap the credit markets directly. These markets cater to safe and profitable industries, and are most active when riskless rates or intermediary earnings are low. We show that determinants of lender selection sharpen during investment downturns and that there are substantial asymmetries in the way firms enter and exit capital markets. These results support a theoretical framework where intermediaries have better reorganizational skills but a higher cost of capital than bondholders

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