Heterogeneous Multiple Bank Financing: Does it ReduceInefficient Credit-Renegotiation Incidences

Small and medium-sized firms often obtain capital via a mixture of relationshipand arm's-length bank lending. We show that such heterogeneous multiple bankfinancing leads to a lower probability of inefficient credit foreclosure than bothmonopoly relationship lending and homogeneous multiple bank financing. Yet, inorder to reduce hold-up and coordination-failure risk, the relationship bank's fraction of total firm debt must not become too large. For firms with intermediateexpected profits, the probability of inefficient credit-renegotiation is shown to decrease along with the relationship bank's information precision. For firms withextremely high or extremely low expected returns, however, it increases.