Evergreening
68 Pages Posted: 28 Oct 2021 Last revised: 28 Jan 2023
Date Written: October, 2021
Abstract
We develop a simple model of relationship lending where lenders have incentives for evergreening loans by offering better terms to firms that are close to default. We detect such lending behavior using loan-level supervisory data for the United States. Banks that own a larger share of a firm's debt provide distressed firms with relatively more credit at lower interest rates. Building on this empirical validation, 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
JEL Classification: E43, E44, E60, G21, G32
Suggested Citation: Suggested Citation