Banks' Competitor - Specific Knowledge in Loan Markets

This study examines the effect of banks' competitor-specific knowledge, whether a bank has lent money to a firm's product-market competitors (i.e., rivals), on both the matching of firm to lenders and the pricing of loans on borrowing in the loan market. We find an increased propensity of firms pairing up with a bank that has also lent to firms' rivals and a corresponding reduction in the spread over LIBOR for those loans. The preceding is consistent with lenders being able to leverage their inside knowledge of firms within the same product market, reduce their information processing costs, and offer lower price loans. The relation between lending to rivals is accentuated for firms with high levels of financial reporting opacity and attenuated for firms with high proprietary costs. These cross-sectional results are consistent with the benefits to banks that lend to rivals being greater when financial reporting opacity is higher and the costs to firms being higher when firms have greater potential proprietary information.