Evergreening

RePEc Short ID: pfa225
ORCID iD: 0000-0002-3759-2172

Faria-e-Castro, Miguel; Paul, Pascal; Sanchez, Juan M.

doi:10.24148/wp2022-14

Working Paper

Evergreening

Abstract: We develop a simple model of relationship lending where lenders have incentives for evergreening loans by offering better terms to less productive and more indebted firms. We detect such lending behavior using loan-level supervisory data for the United States. Low-capitalized banks systematically distort firms’ risk assessments to window-dress their balance sheets. To avoid further reductions in their capital ratios, such banks extend relatively more credit to underreported borrowers. We incorporate the theoretical mechanism into a dynamic heterogeneous-firm model to show that evergreening affects aggregate outcomes, resulting in lower interest rates, higher levels of debt, and lower productivity.

Keywords: evergreening; zombie firms; bank lending; misallocation;

https://doi.org/10.24148/wp2022-14