Bank loans, bonds, and information monopolies across the business cycle: test of the South African market
Date
2013-06-04
Authors
Nkambule, Mbongiseni Thokozani
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Abstract
Corporate finance theory suggests that bank’s private information about
borrowers lets them hold up borrowers for higher interest rates and that
hold up power should increase with borrower risk, and if so, banks with
private information about borrowers should increase their rates in
recessions more than warranted by borrower risk alone. Studies have
been concluded in other markets for these propositions, particularly for
the US market. This paper has replicated these studies for an emerging
economy (Republic of South Africa) to see if the findings will hold across
dissimilar markets. Hold up cost is not just a function of information
monopoly, Rajan, 1992 posits that firms with a higher probability of
failure should suffer more from informational hold-up cost. The risk of
failure is more pronounced during recession than in expansion and
hence relationship banks with information monopolies are able to extract
more rents in recession than warranted by borrower default risk alone.
Using literature that suggest that information rents can be
mitigated by multiple banking relationships, I investigated further,
whether this problem of hold up cost can be mitigated through a different
channel by studying credit spreads of firms that have publicly sourced
funds, and continued to seek private funds in the South African
market.Using LOANSPREAD as the dependent variable in a regression
model, I find that loan spreads are higher for bank-dependent firms, rise
in recessions and rise by a greater amount in recessions for bankdependent
firms. In the context of this study I define bank-dependent
firms as those firms who have issued no public bond. The key finding is
that, indeed multiple banking relationships can reduce informational
monopolies, but issuing public bonds can be another channel that South
African firms can use to avoid being taken advantage of by financiers
with information monopoly over competing financiers.
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Keywords
Bank loans, Public debt, Corporate finance