Heterogeneous Multiple Bank Financing, Optimal Business Risk and Information Disclosure

This paper studies optimal risk-taking and information disclosure by firms that obtain financing from both a 'relationship' bank and 'arm's-length' banks. We find that firm decisions are asymmetrically influenced by the degree of heterogeneity among banks: lowly-collateralized firms vary optimal risk and information precision along with the degree of relationship lending for projects with low expected cash-flows, while highly-collateralized firms do so for projects with high expected cash-flows. Incidences of inefficient project liquidation are minimized if the former firms rely on relationship banking to a low degree, the latter to a large degree.