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RFS Advance Access originally published online on February 21, 2006
Review of Financial Studies 2006 19(3):967-1000; doi:10.1093/rfs/hhj021
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Right arrow G14 - Information and Market Efficiency; Event Studies
Right arrow G21 - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
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© The Author 2006. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org.

Competition and Strategic Information Acquisition in Credit Markets

Robert Hauswald
Kogod School of Business, American University

Robert Marquez
W. P. Carey School of Business, Arizona State University

Address correspondence to R. Hauswald, Kogod School of Business, American University, Washington, DC 20016-8044, or email: hauswald{at}american.edu.

We investigate the interaction between banks’ use of information acquisition as a strategic tool and their role in promoting the efficiency of credit markets when a bank’s ability to gather information varies with its distance to the borrower. We show that banks acquire proprietary information both to soften lending competition and to extend their market share. As competition increases, investments in information acquisition fall, leading to lower interest rates but also to less efficient lending decisions. Consistent with the recent wave of bank acquisitions, we also find that merging for informational reasons with a competitor is an optimal response to industry consolidation.


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