TEL  Vol.3 No.2 , April 2013
The Impact of Bank Health on Coordination among Creditors
Abstract: We investigate how the health of a relationship bank impacts upon coordination among creditors and how it affects the firm’s behavior. We show that if the relationship bank is healthy, creditors coordinate each other and the firm takes an efficient action but if it becomes financially distressed, a coordination problem arises ex post and the inefficient liquidation of the firm’s projects may occur. This coordination failure, in turn, increases the interest payments ex ante so that the firm is more likely to choose an inefficient action.
Cite this paper: K. Toyofuku, "The Impact of Bank Health on Coordination among Creditors," Theoretical Economics Letters, Vol. 3 No. 2, 2013, pp. 108-118. doi: 10.4236/tel.2013.32018.

[1]   F. Modigliani and M. Miller, “The Cost of Capital, Corporation Finance and the Theory of Investment,” American Economic Review, Vol. 48, No. 3, 1958, pp. 261-297.

[2]   M. A. Petersen and R. G. Rajan, “The Benefits of Lending Relationships: Evidence from Small Business Data,” Journal of Finance, Vol. 49, No. 1, 1994, pp. 3-37. doi:10.1111/j.1540-6261.1994.tb04418.x

[3]   A. Boot, “Relationship Banking: What Do We Know,” Journal of Financial Intermediation, Vol. 9, No. 1, 2000, pp. 7-25. doi:10.1006/jfin.2000.0282

[4]   A. Boot and A. Thakor, “Can Relationship Banking Survive Competition,” Journal of Finance, Vol. LV, No. 2, 2000, pp. 679-713. doi:10.1111/0022-1082.00223

[5]   A. Berger and G. Udell, “Relationship Lending and Lines of Credit in Small Firms Finance,” Journal of Business, Vol. 68, No. 3, 1995, pp. 351-382. doi:10.1086/296668

[6]   M. S. Gibson, “Can Bank Health Affect Investment? Evidence from Japan,” Journal of Business, Vol. 68, No. 3, 1995, pp. 281-308. doi:10.1086/296666

[7]   M. S. Gibson, “More Evidence on the Link between Bank Health and Investment in Japan,” Journal of the Japanese and International Economies, Vol. 11, No. 3, 1997, pp. 296-310. doi:10.1006/jjie.1997.0379

[8]   K. H. Bae, J. K. Kang and C. W. Lim, “The Value of Durable Bank Relationships: Evidence from Korean Banking Shocks,” Journal of Financial Economics, Vol. 64, No. 2, 2002, pp. 181-214. doi:10.1016/S0304-405X(02)00075-2

[9]   S. Ongena and D. Smith, “What Determines the Number of Bank Relation-ships? Cross-Country Evidence,” Journal of Financial Intermediation, Vol. 9, No. 1, 2000, pp. 26-56. doi:10.1006/jfin.1999.0273

[10]   D. Miyakawa, “How Does the Stability of Loan Relation Depend on Its Duration? Evidence from Firm- and Bank-Level Data,” DBJ Discussion Paper Series No. 0903, 2009.

[11]   E. Detragiache, P. Garella and L. Guiso, “Multiple versus Single Banking Relationships: Theory and Evidence,” Journal of Finance, Vol. 55, No. 3, 2000, pp. 1133-1161. doi:10.1111/0022-1082.00243

[12]   C. Bannier, “Heterogeneous Multiple Bank Financing: Does It Reduce Inefficient Credit-Renegotiation Incidence,” Financial Markets and Portfolio Management, Vol. 21, No. 4, 2007, pp. 445-470. doi:10.1007/s11408-007-0062-6

[13]   N. Yamori and A. Murakami, “Does Bank Relationship Have an Economic Value? The Effect of Main Bank Failure on Client Firms,” Economics Letters, Vol. 65, No. 1, 1999, pp. 115-120. doi:10.1016/S0165-1765(99)00133-0

[14]   M. Hori, “Does Bank Liquidation Affect Client Firm Performance? Evidence from a Bank Failure in Japan,” Economics Letters, Vol. 88, No. 3, 2005, pp. 415-420. doi:10.1016/j.econlet.2005.05.007

[15]   S. Ongena, C. S. David and D. Michalsen, “Firms and Their Distressed Banks: Lessens from the Norwegian Banking Crisis,” Journal of Financial Economics, Vol. 67, No. 1, 2003, pp. 81-112. doi:10.1016/S0304-405X(02)00232-5

[16]   R. Elsas, “Empirical Determinants of Relationship Lending,” Journal of Financial Intermediation, Vol. 14, No. 1, 2005, pp. 32-57. doi:10.1016/j.jfi.2003.11.004

[17]   L. A. Farinha and J. A. C. Santos, “Switching from Single to Multiple Bank Lending Relationships: Determinants and Implications,” Journal of Financial Intermediation, Vol. 11, No. 2, 2002, pp. 124-151. doi:10.1006/jfin.2001.0328

[18]   K. Ogawa, E. Sterken and I. Tokutsu, “Why Do Japanese Firms Prefer Multiple Bank Relationship? Some Evidence from Firm-Level Data,” Economic Systems, Vol. 31, No. 1, 2007, pp. 49-70. doi:10.1016/j.ecosys.2006.08.002

[19]   K. Ogawa, E. Sterken and I. Tokutsu, “Multiple Bank Relationships and the Main Bank System: Evidence from a Matched Sample of Japanese Small Firms and Main Banks,” The Economics of Imperfect Markets: The Effects of Market Imperfections on Economic Decision-Making, 2009, pp. 73-90.

[20]   S. Morris and H. Shin, “Coordination Risk and the Price of Debt,” European Economic Review, Vol. 48, No. 1, 2004, pp. 133-153. doi:10.1016/S0014-2921(02)00239-8

[21]   F. Hubert and D. Schafer, “Coordination Failure with Multiple-Source Lending, the Cost of Protection against a Powerful Lender,” Journal of Institutional and Theoretical Economics, Vol. 158, No. 2, 2002, pp. 256-275. doi:10.1628/0932456022975394

[22]   G. Corsetti, A. Dasgupta, S. Morris and H. S. Shin, “Does One Soros Make a Difference? A Theory of Currency Crises with Large and Small Traders,” Review of Economic Studies, Vol. 71, No. 1, 2004, pp. 87-114. doi:10.1111/0034-6527.00277