Local Bank Financial Constraints and Firm Access to External Finance

neither more likely to default nor more likely to default earlier than loans issued in otherperiods.Using interest revenue data from bank income statements I repeat the estimation of theprevious subsection using as dependent variable a measure of bank interest revenues or profitsscaled by the amount of loans outstanding of bank i at month t.Interest Revenue it /Loans it = α i + α t + γ( lnF it – lnF it-1 ) + ω it(IV-5)The coefficient of interest, γ, measures the change in interest revenue per dollar of lendingduring credit supply expansions. The estimated coefficient is small and statisticallyindistinguishable from zero (column 3 of Table VI), which indicates that there is no change ininterest revenue per dollar of loan during credit expansions. Together with the result on defaultrates, the evidence indicates that the marginal profitability of loans did not decline during creditexpansions. This is inconsistent with the free cash flows hypothesis, where constraints are inplace to prevent bank management from undertaking unprofitable investments.Focusing on risk and interest revenue proxies can potentially underestimate the true effect ofthe lending expansion on profitability, especially for new borrowers. In Petersen and Rajan(1995) banks may accept short term losses when lending to new borrowers in order to obtaininformational rents later in the relationship. Such underestimation is not a concern for thepurposes of this paper because it reinforces the argument that the profitability of lending didnot decline during lending expansions. Still, I verify that the above results hold in the subsampleof borrowers with a pre-existing relationship with the bank, among which the bias is less likely(Panel 2 of Table VI). The results are confirmed: marginal loans to existing bank borrowersissued during lending expansions are not more likely to default.30