From Soft and Hard-Nosed Bankers - Bank Lending Strategies and the Survival of Financially Distressed Firms From Soft and Hard-Nosed Bankers - Bank Lending Strategies and the Survival of Financially Distressed Firms From Soft and Hard-Nosed Bankers- Bank

Abstract

Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar. Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW. Download this ZEW Discussion Paper from our ftp server: ftp://ftp.zew.de/pub/zew-docs/dp/dp09059.pdf Executive Summary Public banks face a public contract to provide credit access to rms and households within their business district. Closely related to that, cooperative banks aim to support their members. Both are asked to nance projects as long as economically sustainable. Bank owners grand additional payment that reduce renancing costs. It is argued, that private banks are disadvantaged due to these renancing cost dierentials and competition is distorted. While the strategy set of public and cooperative banks is xed, private banks are free to choose which strategy they want to apply. In this paper I analyze, whether private banks adopt a dierent lending strategy. If private banks act as hard-nosed bankers as rms become nancially distressed, the probability of market exit should be higher compared to rms nanced by public or cooperative banks. In order to test this empirically probit models are employed estimating the probability of market exit for rms that became nancially distressed in the years between 2000 and 2005. A Heckman variation of the probit model controls for potential selection bias due to the data generating process. Information on rm'snancing behavior, entrepreneurial education, as well as internal and external factors inuencing a rm's market exit are used as covariates. Results show that rms with a savings or a cooperative bank as their main bank present a lower probability of exiting the market than those with private banks. The reasons for dierent lending strategies remain unclear. A possible explanation would be that private banks adopt stricter rules when rms become nancial distressed. Private banks could ask for additional control rights or rule out renegotiation in general. Private banks credit portfolio risk reduces indirectly if high-risk rms anticipated the behavior of the private banks and self select to public or cooperative banks. But the approximated credit portfolio risk by bank types, based on rms credit rating scores, indicate that private banks bear higher risk compared to public or cooperative banks. Abstract Do private banks act as hard-nosed bankers when rms get nancially distressed compared to public banks that have the mandate to support regional economy? For German rms in the period 2000-2005, I nd that the probability of leaving the market after nancial distress is higher for rms nanced by private banks. The eects of dierent lending strategies are even larger for cooperative banks than for public banks