We develop a simple model of concentrated 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.
Sánchez, Juan M., Miguel Faria-e-Castro, and Pascal Paul. 2022. “Evergreening,” Federal Reserve Bank of San Francisco Working Paper 2022-14. Available at https://doi.org/10.24148/wp2022-14