Life-Cycle Patterns of Interest-Rate Mark-Ups in Small-Firm Finance


  • We are grateful for comments from Eivind Bernhardsen, Loran Chollete, Robert Hauswald, Ari Hyytinen, Kjersti-Gro Lindquist, Charlotte Ostergaard, Richard Rosen, Erik Sørensen, and two anonymous referees.

  • Correction added after online publication on 20th February 2012; the original text read ‘However, we find evidence that bank market concentration for older firms’, omitting the word ‘matters’.


We derive empirical implications from a theoretical model of bank–borrower relationships. The interest-rate mark-ups of banks are predicted to follow a life-cycle pattern over the age of the borrowing firms. Because of endogenous bank monitoring by competing banks, borrowing firms initially face a low mark-up, and thereafter an increasing mark-up as a result of informational lock-in, until it falls for older firms when the lock-in is resolved. By applying a large sample of predominantly small unlisted firms and a new measure of asymmetric information, we find that firms with significant asymmetric-information problems have a more pronounced life-cycle pattern of interest-rate mark-ups. Additionally, we examine the effects of concentrated banking markets on interest-rate mark-ups. The results indicate that the life cycle of mark-ups is mainly driven by asymmetric-information problems and not by concentration. However, we find evidence that bank market concentration matters for older firms