Creditor Rights and Relationship Banking: Evidence from a Policy Experiment

Bhue, G S and Prabhala, N R and Tantri, P L (2015) Creditor Rights and Relationship Banking: Evidence from a Policy Experiment. In: Finance Seminar with Nagpurnanand Prabhala, University of Maryland, May 8, 2015, University of Maryland.

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We examine the relation between creditor rights and relationship banking by exploiting natural variation in creditor rights induced by changes in law. In 2002, a change in bankruptcy law in India significantly increased creditor rights by letting lenders repossess collateral and auction it without court intervention. We argue that the increase in creditor rights reduces the value of soft information gathered by relationship banks, leading firms and banks to shift away from relationship banking. We find empirical evidence consistent with this view. Relationship lending declines after the increase in creditor rights. This shift is more pronounced for banks that may have greater informational advantage, small firms and those not belonging to established business groups, and in geographic areas with low bank competition.

Item Type: Conference or Workshop Item (Paper)
Subjects: Finance
Date Deposited: 10 May 2015 05:58
Last Modified: 01 Jul 2019 17:08

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