Date Added: Oct 2009
Do private banks act as hard-nosed bankers when firms get financially distressed compared to public banks that have the mandate to support regional economy? For German firms in the period 2000-2005, the author finds that the probability of leaving the market after financial distress is higher for firms financed by private banks. The effects of different lending strategies are even larger for cooperative banks than for public banks. Financial intermediaries screen projects and allocate funds in profitable investments. As complete contracts are not feasible there may be a need to renegotiate financial contracts.