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Bank competition, concentration and EU SME cost of debt

Wang, X., Han, L. and Huang, X. (2020) Bank competition, concentration and EU SME cost of debt. International Review of Financial Analysis, 71. 101534. ISSN 1057-5219 (In Press)

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To link to this item DOI: 10.1016/j.irfa.2020.101534

Abstract/Summary

Despite the plentiful debate on the effects of bank competition on SME access to finance and growth, only few studies have explored the impacts on SME cost of debt. This study examines how bank market power affects the credit costs of SMEs by using unique matched SME-bank data from 17 EU countries. We show that bank market power reduces the cost of debt for SMEs. Such a favorable effect is stronger for SMEs that are less informationally transparent, and in the economies subject to less credit information depth and business extent of disclosure. These findings support the Information-based Hypothesis, whereby market power motivates banks to invest in soft information acquisition and to build lending relationships to reduce information costs. In addition, we show that despite the favorable effects of relationship lending brought by bank market power, SME credit conditions worsen in a more concentrated banking market.

Item Type:Article
Refereed:Yes
Divisions:Henley Business School > Business Informatics, Systems and Accounting
ID Code:90916
Uncontrolled Keywords:Bank market power, Cost of debt, EU countries, Financing constraints, SME
Publisher:Elsevier

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