Relationship Lending and Lines of Credit in Small Firm Finance
Allen N. Berger
University of South Carolina - Darla Moore School of Business; Wharton Financial Institutions Center; European Banking Center
Gregory F. Udell
Indiana University - Kelley School of Business - Department of Finance
NYU Working Paper No. FIN-94-016
This paper examines the role of relationship lending in small firm finance. We examine price and nonprice terms of bank lines of credit (L/C) extended to small firms. Our focus on bank L/Cs allows us toe examine a type of loan contract in which the bank-borrower relationship is likely to be an important mechanism for solving asymmetric information problems associated with financing small enterprises. We find that borrowers with longer banking relationships pay lower interest rates and are less likely to pledge collateral. These results are consistent with theoretical arguments that relationship lending generates valuable information about borrower quality.
Number of Pages in PDF File: 53
Date posted: November 11, 2008
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