Discussion paper

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

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.

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Citation

Schnitzer, M (1998), ‘DP2013 On the Role of Bank Competition for Corporate Finance and Corporate Control in Transition Economies‘, CEPR Discussion Paper No. 2013. CEPR Press, Paris & London. https://cepr.org/publications/dp2013