Life-cycle Patterns Of Interest Rate Markups In Small Firm Finance

The authors derive empirical implications from a stylized theoretical model of bank-borrower relationships. Banks' interest rate markups are predicted to follow a life-cycle pattern over the borrowing firms' age. Due to endogenous bank monitoring by competing banks, borrowing firms initially face a low markup, thereafter an increasing markup due to informational lock-in until it falls for older firms when lock-in is resolved. By applying a large sample of small unlisted firms and a new measure of asymmetric information, they find that firms with significant asymmetric information problems have a more pronounced life-cycle pattern of interest rate markups.