Federal Deposit InsuranceCorporation• Center for Financial Researchh
Sanjiv R. Das
Darrell Duffie
Nikunj Kapadia
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
FDIC Center for Financial Research
Working Paper
No. 2005-02
Asymmetric Information and Liquidity Constraints:
A More Complete Test
Dmytro Holod
Joe Peek
December 2004
Sanjiv R. Das
Darrell Duffie
Nikunj Kapadia
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
FDIC Center for Financial Research
Working Paper
No. 2005-02
Asymmetric Information and Liquidity Constraints:
A More Complete Test
Dmytro Holod
Joe Peek
December 2004
December 10, 2004
Asymmetric Information and Liquidity Constraints: A More Complete Test
Dmytro Holod and Joe Peek*
Abstract
This study shows that financial market imperfections do matter for a firm’s access to
external finance. Prior studies of the importance of liquidity constraints faced by nonfinancial
firms have suffered from a glaring weakness. They have been based on a sample of publicly
traded firms, omitting precisely those small firms most likely to be liquidity constrained. We
overcome this limitation by focusing on the banking sector. Unlike the nonfinancial sector, the
banking sector has balance sheet and income data available for all firms, whether or not they are
publicly traded. This allows the use of a superior measure of the degree of information
asymmetry across firms by distinguishing between publicly traded and non-publicly traded firms.
Furthermore, we focus on changes in monetary policy that represent exogenous (to the banks)
changes in the financing constraints faced by banks. We find that publicly traded banks, which
exhibit a lower degree of information asymmetry, are better able to overcome financial market
frictions, compared to the relatively opaque non-publicly traded banks, when monetary policy is
tightened. Lending by the more transparent publicly traded banks is less affected by a monetary
policy tightening in large part due to their ability to issue uninsured large time deposits. These
results are obtained controlling for firm (bank) size, a dimension commonly used in the literature
as the measure of the degree of firm access to external finance.
Key words: Asymmetric information, liquidity constraints, banks, external finance, monetary
policy
JEL Classifications: G21, G32, E51, E52
CFR research program: Banking and the Economy
*Department of Economics, University of Kentucky, Lexington, KY 40506-0034, Phone: (859)
229-2101, Fax: (859) 323-1920, E-mail: dholod@uky.edu; and Finance Area, 437C Gatton
Business and Economics Building, University of Kentucky, Lexington, KY 40506-0034, Phone:
(859) 257-7342, Fax: (859) 257-9688, E-mail: jpeek0@uky.edu. We would like to thank
participants at presentations at the FDIC Center for Financial Research fall workshop, the
Financial Management Association meetings, the FIRS Conference on Banking, Insurance and
Intermediation, and the Federal Reserve Bank of Cleveland for comments on earlier versions of
this paper. We also thank the FDIC Center for Financial Research for financial support. Any
opinions, findings, and conclusions or recommendations expressed in this study are those of the
authors and do not necessarily reflect the views of the FDIC.
Asymmetric Information and Liquidity Constraints: A More Complete Test
Dmytro Holod and Joe Peek*
Abstract
This study shows that financial market imperfections do matter for a firm’s access to
external finance. Prior studies of the importance of liquidity constraints faced by nonfinancial
firms have suffered from a glaring weakness. They have been based on a sample of publicly
traded firms, omitting precisely those small firms most likely to be liquidity constrained. We
overcome this limitation by focusing on the banking sector. Unlike the nonfinancial sector, the
banking sector has balance sheet and income data available for all firms, whether or not they are
publicly traded. This allows the use of a superior measure of the degree of information
asymmetry across firms by distinguishing between publicly traded and non-publicly traded firms.
Furthermore, we focus on changes in monetary policy that represent exogenous (to the banks)
changes in the financing constraints faced by banks. We find that publicly traded banks, which
exhibit a lower degree of information asymmetry, are better able to overcome financial market
frictions, compared to the relatively opaque non-publicly traded banks, when monetary policy is
tightened. Lending by the more transparent publicly traded banks is less affected by a monetary
policy tightening in large part due to their ability to issue uninsured large time deposits. These
results are obtained controlling for firm (bank) size, a dimension commonly used in the literature
as the measure of the degree of firm access to external finance.
Key words: Asymmetric information, liquidity constraints, banks, external finance, monetary
policy
JEL Classifications: G21, G32, E51, E52
CFR research program: Banking and the Economy
*Department of Economics, University of Kentucky, Lexington, KY 40506-0034, Phone: (859)
229-2101, Fax: (859) 323-1920, E-mail: dholod@uky.edu; and Finance Area, 437C Gatton
Business and Economics Building, University of Kentucky, Lexington, KY 40506-0034, Phone:
(859) 257-7342, Fax: (859) 257-9688, E-mail: jpeek0@uky.edu. We would like to thank
participants at presentations at the FDIC Center for Financial Research fall workshop, the
Financial Management Association meetings, the FIRS Conference on Banking, Insurance and
Intermediation, and the Federal Reserve Bank of Cleveland for comments on earlier versions of
this paper. We also thank the FDIC Center for Financial Research for financial support. Any
opinions, findings, and conclusions or recommendations expressed in this study are those of the
authors and do not necessarily reflect the views of the FDIC.