I provide evidence of a new mechanism by which access to public securities mitigates the bank hold-up problem and reduces loan spreads – it increases a borrower's bargaining power vis-a-vis… Click to show full abstract
I provide evidence of a new mechanism by which access to public securities mitigates the bank hold-up problem and reduces loan spreads – it increases a borrower's bargaining power vis-a-vis a lender by offering a bank loan substitute. Difference-in-differences results indicate that loan spreads decline following legislation that makes public securities more attractive, but only when public securities represent a credible substitute for the bank loan (i.e., for term loans taken out by credit rated borrowers). Spreads on revolving lines of credit, which are more complementary with public securities, increase.
               
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