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RFS Advance Access published online on February 21, 2006
Review of Financial Studies, doi:10.1093/rfs/hhj021
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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

Article

Competition and Strategic Information Acquisition in Credit Markets

Robert Hauswald 1 * and Robert Marquez 2
1 Kogod School of Business, American University Washington, DC
2 Robert H. Smith School of Business, University of Maryland College Park, MD

* To whom correspondence should be addressed.
Robert Hauswald, E-mail: hauswald{at}american.edu


  Abstract

We investigate the interaction between banks’ use of information acquisition as a strategic tool and their role in promoting the effciency 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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