DP16142 Banking on Experience
We study the impact of different dimensions of banks' experience on the extent of banks' moral hazard in loan markets. Using rich U.S. corporate loan-level data, we find that banks' prior experience with borrowers and co-lenders reinforces their monitoring incentives. Banks' sectoral experience, in contrast, appears to dilute monitoring incentives, calling for a larger lead share in the lending syndicate. In cross-sectional tests, we unpack experience into different dimensions and study to what extent the various components of lenders' experience improve credit market outcomes. The key to our identification strategy is that we exploit variation in experience for the same bank at a given point in time across firms, sectors and other banks. In addition, bank mergers are used as an instrument to identify exogenous shocks to the stock of bank's experience.