DP2013 On the Role of Bank Competition for Corporate Finance and Corporate Control in Transition Economies

Author(s): Monika Schnitzer
Publication Date: November 1998
Keyword(s): Bank Competition, Corporate Finance, Corporate Governance, Restructuring, screening, Transition Economies
JEL(s): D43, G21, G34, L13, P31
Programme Areas: Financial Economics, Industrial Organization, Transition Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=2013

Banks play a central role in financing and monitoring firms in transition economies. This study examines how bank competition affects the efficiency of credit allocation; monitoring of firms; and the firms' restructuring effort. In our model, banks compete to finance an investment project with uncertain return. By screening the firm a bank learns about its profitability. Surprisingly, it is found that an increase in bank competition need not reduce a bank's screening incentive even though it lowers its expected profits. Furthermore, competition has a positive impact on the firms restructuring efforts. This suggests a positive role for bank competition in transition economies.