We demonstrate theoretically and empirically the presence of forbearance lending by profit maximizing banks to influential buyers in a supply network. If the financial market is concentrated, then banks can internalize the negative externality of an influential firm’s exit. As a result, they may keep refinancing for a loss-making influential firm at an interest rate lower than the prime rate. This mechanism sheds new light on the discussion about bailouts offered to zombie firms. Our empirical study, with a unique dataset containing information about interfirm relationships and main banks, provides evidence for such network-motivated lending decisions.
Keywords: supply network; influence coefficient; forbearance; bailout, zombie
JEL classification: C55; D57; G21; G32; L13; L14