Using a novel measure of the degree of information asymmetry across firms, this study shows that information-related financial market imperfections do matter for a firm’s access to external finance. Prior studies of the importance of liquidity constraints faced by nonfinancial firms have suffered from a glaring weakness. They have been based on a sample of publicly traded firms, omitting precisely those firms most likely to be liquidity constrained. Furthermore, they have tended to rely on indirect measures of the degree of information asymmetry, such as firm size. We overcome these limitations by focusing on the banking sector. Unlike the nonfinancial sector, the banking sector has balance sheet and income data available for all firms, whether or not they are publicly traded. This allows the use of a superior measure of the degree of information asymmetry across firms by distinguishing between publicly traded and non-publicly traded banks. We focus on changes in monetary policy that represent exogenous (to the banks) changes in the financing constraints they face. We find that publicly traded banks, which exhibit a lower degree of information asymmetry, are better able to overcome information-based financial market frictions, compared to the relatively opaque non-publicly traded banks, when monetary policy is tightened. Lending by the more transparent publicly traded banks is less affected by a monetary policy tightening in large part due to their relative advantage in raising external funds by issuing uninsured large time deposits. These results are obtained controlling for bank (and bank holding company) size, a dimension commonly used in the literature as the measure of the degree of firm access to external finance. Moreover, we show that the distinction between publicly traded and non-publicly traded banks dominates bank size as an indicator of the degree of access to external funds.

This study investigates the direct link between regulatory enforcement actions and the shrinkage of bank loans to sectors likely to be bank dependent. We focus on New England because that region has experienced both the widespread application of formal regulatory actions and substantial reductions in new lending by banks. Controlling for weakness in loan demand, previous studies have been able to attribute part of this bank shrinkage to loan supply, with the degree of a bank’s shrinkage related to its capital-to-asset ratio. In this study, we further partition the shrinkage due to loan supply into the component due to explicit regulatory enforcement actions and that due to a voluntary response by bank management to low capital-to-asset ratios. We find that banks with formal actions shrink at a significantly faster rate than those without, even after controlling for differences in capital-to-asset ratios. Furthermore, much of the reduced lending has been in loan categories containing primarily bank-dependent borrowers, indicating that the capital crunch has resulted in a credit crunch.

We find that acquirers tend to recast the target in their own image, causing the small business loan portfolio share of the consolidated bank to converge toward the pre-merger portfolio share of the acquirer. However, concerns that this pattern will necessarily reduce bank small business lending may be overblown. First, most mergers are of two (or more) small banks. Second, acquirers are almost as likely to have larger as smaller shares of small business loans in their portfolios, compared to their targets. Finally, in roughly half the mergers, small business loans increase in the period immediately after the merger.

We examine foreign acquisitions of United States banks around the time of the ownership change to determine whether the observed poor performance of foreign subsidiaries is the result of changes in business strategy or the preexisting characteristics of the target bank. We find that many of the problems were already present at the time of acquisition. However, changes in business strategy by the foreign owners were generally not successful in raising the bank’s performance level to that of its domestic peers.