The Cost of Intermediary Market Power for Distressed Borrowers / Winston Wei Dou, Wei Wang, Wenyu Wang.

Format:

Book

Author/Creator:

Dou, Winston Wei.

Contributor:

Wang, Wei.

Wang, Wenyu.

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w35206.

NBER working paper series no. w35206

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2026.

Summary:

Distressed firms need urgent financing to preserve operations and avoid inefficient liquidation, but they borrow in concentrated markets shaped by existing-creditor blocking power and a small group of specialized lenders. We show that these borrowers pay exceptionally high loan spreads even after removing compensation for credit risk, liquidity risk, and non-risk loan-making costs. To quantify and decompose lender market power, we develop and estimate a dynamic game-theoretic model of distressed lending with latent demand heterogeneity, endogenous lender participation, creditor blocking power, and tacit collusion sustained by repeated syndication. Using granular facility-level data on debtor-in-possession (DIP) loans and highly speculative loans, we find that lender market power explains 533 bps of risk-adjusted spreads in the DIP loan market and 300 bps in the highly speculative loan market, including about 140 bps from tacit collusion in each market. Lender market power is therefore a major source of financial distress costs, reducing survival-critical liquidity by 16-20% and thereby worsening asset-value destruction.

Notes:

May 2026.

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