The Sources of Debt Matter, Too

Abstract

This paper examines the effects of bank loans, loans from non-bank financial intermediaries, and unused bank credit lines on firm cash holdings, equity risk, and investment. Firms with more bank loans have more cash and investment, but lower equity risk. Firms with more non-bank private debt have lower equity risk and less investment. Firms with more unused credit lines have less cash and lower equity risk, but greater investment. Results suggest that depending on type, private debt mitigates the information asymmetry or asset substitution problem, or both. Results also imply that deposit relationships associated with commercial bank borrowing attribute to banks' information advantage.