Lending Relationships, Credit Availability, Firm Value and Banking Crises
41 Pages Posted: 8 Mar 2008
Date Written: March 3, 2008
Abstract
We examine whether lending relationships enhance credit availability during banking crises when a bank's willingness to lend is weakest. Using a unique sample of listed firms in Korea we find that during the Asian financial crisis firms with closer banking relationships benefited from greater access to credit even from their undercapitalized banks. This finding persists even after controlling for "evergreening" behavior by undercapitalized banks. We also find that firms with closer banking relationship experienced smaller decrease in their firm values than those with weaker banking relationships. This casts doubt on the view that a shock to a closely-tied bank hurts its relationship borrowers relatively more badly and that firms thus ought to borrow from as many banks as possible.
Keywords: G21
JEL Classification: lending relationship, credit availability, banking crisis
Suggested Citation: Suggested Citation
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