Abstract:
When firms borrow from multiple concentrated creditors such as banks they appear
to differentiate their allocation of borrowing. In this paper, we put forward
hypotheses for this borrowing pattern based on incomplete contract theories and
test them using a sample of small U.S. firms. We find that firms with more valuable,
more redeployable, and more homogeneous assets differentiate borrowing more
sharply across their concentrated creditors. We also find that borrowing differentiation
is inversely related to restructuring costs and positively related to firms’
informational transparency. This evidence supports the predictions of incomplete
contract theories: the structure of credit relationships appears to be used as a device
to discipline creditors and entrepreneurs, especially during corporate reorganizations.
