The terms of financial contracts are often negotiated and such negotiations take place in markets where assets are traded over-the-counter. These include the mortgage-backed securities, corporate bond, municipal bond, corporate takeover, bank loan, private equity, and real estate markets. In negotiations, parties could make offers and counteroffers to try to reach a deal. Strategic bargaining theories show that price adjustments over the course of the negotiation could elicit private information. Although bargaining is important in financial markets, little is known about the use of negotiating as a screening mechanism. The main reason for this lack of evidence is that existing studies rely on financial contract data, because real world negotiations take place in private meetings, on the phone or by e-mail and are usually not centrally recorded. Therefore, an important empirical challenge is that financial contracts do not reveal whether the terms were set in a single offer based on observable risk, or rather the outcome of a negotiation process.
In this paper, I propose and test a model of credit negotiations between banks and firms. The model shows that price negotiations allow banks to screen out firms by making sequential credit offers over the course of the negotiation. The model generates empirical predictions, which I test using a unique dataset on credit line negotiations between small firms and a large commercial bank, including both rejected and accepted offers and the ex post performance of these lines of credit.
|211||Thomas Mosk||Bargaining with a Bank||2018||Financial Intermediation||Credit lines, Contract terms, Bargaining, Screening|