DP8692 On the Non-Exclusivity of Loan Contracts: An Empirical Investigation

Author(s): Hans Degryse, Vasso Ioannidou, Erik von Schedvin
Publication Date: December 2012
Keyword(s): contractual externalities, credit supply, debt seniority, non-exclusivity
JEL(s): G21, G34, L13, L14
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8692

Credit contracts are non-exclusive. A string of theoretical papers shows that nonexclusivity generates important negative contractual externalities. Employing a unique dataset, we identify how the contractual externality stemming from the non-exclusivity of credit contracts affects credit supply. In particular, using internal information on a creditor?s willingness to lend, we find that a creditor reduces its loan supply when a borrower initiates a loan at another creditor. Consistent with the theoretical literature on contractual externalities, the effect is more pronounced the larger the loans from the other creditor. We also find that the initial creditor?s willingness to lend does not change if its existing and future loans retain seniority over the other creditors? loans and are secured with assets whose value is high and stable over time.