Advertisement

Does Corporate Lending by Banks and Finance Companies Differ? Evidence on Specialization in Private Debt Contracting

Authors

  • Mark Carey,

    1. Federal Reserve Board
    Search for more papers by this author
  • Mitch Post,

    1. Investment Company Institute
    Search for more papers by this author
  • Steven A. Sharpe

    1. Federal Reserve Board
    Search for more papers by this author
    • Carey and Sharpe are at the Federal Reserve Board. Post is at the Investment Company Institute. The views expressed herein are the authors' and do not necessarily reflect those of the Board of Governors or the Federal Reserve System. We thank the Editor, the referee, Mitch Berlin, Charles Calomiris, Richard Cantor, Ron Feldman, Rick Heyke, Joel Houston, Raghu Rajan, Rich Rosen, and participants in various seminars and conference sessions for helpful comments. We especially thank Margaret Kyle for excellent research assistance.


Abstract

This paper establishes empirically the existence of specialization in private-market corporate lending, adding a new dimension to the public versus private debt distinctions now common in the literature. Comparing corporate loans made by banks and by finance companies, we find that the two types of intermediaries are equally likely to finance information-problematic firms. However, finance companies tend to serve observably riskier borrowers, particularly more leveraged borrowers. Evidence supports both regulatory and reputation-based explanations for this specialization. In passing, we shed light on various theories of debt contracting and intermediation and present facts about finance companies.

Ancillary