Bank lending relations and downstream competition

Abstract

Lenders may internalize competition among rival borrowers. When financing multiple firms in an industry, banks help facilitate tacit collusion by steering borrowers’ investments either through direct control or by alleviating debt overhang. I estimate this portfolio effect using bank mergers as exogenous shocks to the lending network within an industry, and find that common lending decreases investment rates by 3 percentage points, with market power playing a role in the effect on loan amount and credit spreads.