This paper examines the role of relationship lending using a data set on small firm finance. The abilities to acquire private information over time about borrower quality and to use this information in designing debt contracts largely define the unique nature of commercial banking. Recently, a...

This paper examines the reallocation of bank credit from loans to securities in the early 1990s using data on virtually all U.S. banks from 1979 to 1992. The spectacular increase in bank and thrift failures in the 1980s raised concerns about depository institution risk and spurred interest in...

Our paper explores the optimal financial contract for a large investor with potential control over a firm's investment decisions. We show that an optimally designed menu of claims for a large investor will include features resembling a U.S. version of lender liability doctrine, equitable...

We provide evidence on the costs and profitability of relationship lending by banks. We derive bank-specific measures of loan rate smoothing for small business borrowers in response to exogenous shocks to their credit risk and to interest rates, and then estimate cost and profit functions to...

Many argue that one category of bank clientele may have been lost in the rapidly changing structure of the U.S. banking industry small business borrowers. One reason for the concern over small business credit availability is the argument that small business has fallen victim to the increasing...

The authors consider the problem of a risk-averse firm with limited liability. The firm has to select the size of its investment in a risky project. We show that the optimal exposure to risk of the limited liability firm is always larger than under full liability. Moreover, there exists a...

This paper tests the hypothesis that changes to the "too-big-to-fail" (TBTF) doctrine under the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) increased the risk of deposit loss and the cost of funds for large banks. Furthermore, the paper analyzes the implications of the...