Lending Relationships and Loan Contract Terms

We find that repeated borrowing from the same lender translates into a 10—17 bps lowering of loan spreads and that relationships are especially valuable when borrower transparency is low. These results hold using multiple approaches (propensity score matching, instrumental variables, and treatment e...

Full description

Saved in:
Bibliographic Details
Published in:The Review of financial studies 2011-04, Vol.24 (4), p.1141-1203
Main Authors: Bharath, Sreedhar T., Dahiya, Sandeep, Saunders, Anthony, Srinivasan, Anand
Format: Article
Language:English
Subjects:
Bank loans
Banks
Book value
Borrowing
Collateral
Debt contracts
Financial instruments
Financial services
Lenders
Loans
Moral hazard
Secured loans
Studies
Syndicates
Transparency
Value
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:We find that repeated borrowing from the same lender translates into a 10—17 bps lowering of loan spreads and that relationships are especially valuable when borrower transparency is low. These results hold using multiple approaches (propensity score matching, instrumental variables, and treatment effects model) that control for the endogeneity of relationships. We also provide a demarcation line between relationship and transactional lending. Spreads charged for relationship loans and nonrelationship loans are statistically identical if the borrower is in the largest 30% by asset size; has public rated debt; or is part of the S&P 500 index. Past relationships reduce collateral requirements and are also associated with obtaining larger loans. Our results imply that, even for firms that have multiple sources of outside financing, borrowing from a prior lender obtains better loan terms.
ISSN:0893-9454
1465-7368
DOI:10.1093/rfs/hhp064