Ch. 5: Banks in Capital Markets 223
highlight the impact of organizational form on the incentives and behavior of investors.
This is an area worthy of more study.
7.2. Beyond screening and monitoring
The central idea behind much of the banking literature is that banks have access to
private information about the firm. The bank’s ability to generate information has im-
plications on the firm’s financing decision. Can banks play other roles for firms that
go beyond screening and monitoring? In studies of venture capitalists, there is some
evidence that venture capitalists do not simply screen and monitor but also help pro-
vide costly effort in the form of support activities for the firm. When financing the firm,
venture capitalists expect to help the founder professionalize the company (Kaplan and
Stromberg, 2001, 2004). Also, firms financed by venture capitalists are more likely to
professionalize early and are more likely to get their product to market (Hellmann and
Puri, 2000, 2002). Lerner (1995), Baker and Gompers (2003), and Hochberg (2004)
find that venture capitalists play an important role in determining the composition of
the board of directors.Lindsey (2004)finds some evidence that venture capitalists fa-
cilitate strategic alliances of firms within their portfolio. Of course, one could argue
that the main difference between banks and venture capitalists is that banks typically
provide only debt financing while venture capitalists have equity-based contracts. How-
ever, in many countries around the world, banks are not prohibited from taking equity
stakes. Yet, other than some evidence on banks’ role on boards of directors (see e.g.
Kroszner and Strahan, 2001), we have little evidence that banks play a support role for
their borrowers. Is there limited evidence because banks do not provide these services
or simply because this possibility has not been explored by researchers? Again, this is
an area where more research is warranted.
7.3. Loan sales
The loan sales market is rapidly growing, and loans sales are a major source of fund-
ing for banks and a way for banks to manage risk.^35 While a number of studies have
formed and tested theories of the loan sales market, a consensus has not been reached on
the functioning of this very important market. We summarize the literature on the two
prevailing information-based theories of loan sales – the “monitoring technology hy-
pothesis”, and the “comparative advantage hypothesis”.^36 We also provide some recent
evidence on the effects of loan sales on corporate borrowers.
(^35) SeeGorton and Haubrich (1990)for early evidence on loan sales andYago and McCarthy (2004)and
Thomas and Wang (2004)for more recent developments in the loan sales market. SeeGorton and Haubrich
(1990)for empirical evidence on loan sales market size and trends.
(^36) Berger and Udell (1993)provide details on nine competing theories. Non-information based theories in-
clude the “diversification hypothesis”, which claims that loan sales provide a way for banks with limited
opportunities to diversify their loan portfolio (Demsetz, 2000; Haubrich and Thomson, 1996; Pavel and
Phillis, 1987), the “regulatory tax hypothesis”, which suggests that regulatory taxes on on-balance sheet