Abstract

http://ssrn.com/abstract=1785686
 
 

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Lock-In Effects in Relationship Lending: Evidence from Dip Loans


Iftekhar Hasan


Fordham University; Bank of Finland

Gabriel G. Ramirez


Kennesaw State University - Michael J. Coles College of Business

Gaiyan Zhang


University of Missouri at St. Louis - College of Business Administration

Nov 1, 2012


Abstract:     
Do prior lending relationships result in pass-through savings (lower interest rates) for borrowers, or do they lock in higher costs for borrowers? Theoretical models suggest that when borrowers experience greater information asymmetry, higher switching costs, and limited access to capital markets, they become locked into higher costs from their existing lenders. Firms in Chapter 11 seeking debtor-inpossession (DIP) financing often fit this profile. We investigate the presence of lock-in effects using a sample of DIP loans. We first account for selectivity bias by using the inverse mills ratio form a first stage. Then, in a second stage, we jointly estimate the relationship between loan price and non-price terms accounting for selectivity bias. We find that the existence and intensity of prior lending relationships are associated with higher interest costs, longer maturities, and smaller DIP loans. Taken together, our study provides direct evidence that prior lending relationships do create a lock-in effect under certain circumstances, such as DIP financing.

Number of Pages in PDF File: 33

Keywords: relationship lending, DIP financing, bank loans, lock-in effects, debtor-in-possession, financial intermediaries, lending practices

JEL Classification: G21

working papers series


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Date posted: March 15, 2011 ; Last revised: November 14, 2012

Suggested Citation

Hasan, Iftekhar and Ramirez, Gabriel G. and Zhang, Gaiyan, Lock-In Effects in Relationship Lending: Evidence from Dip Loans (Nov 1, 2012). Available at SSRN: http://ssrn.com/abstract=1785686 or http://dx.doi.org/10.2139/ssrn.1785686

Contact Information

Iftekhar Hasan (Contact Author)
Fordham University ( email )
113 West 60th Street
New York, NY 10023
United States
Bank of Finland ( email )
P.O. Box 160
Helsinki 00101
Finland
Gabriel G. Ramirez
Kennesaw State University - Michael J. Coles College of Business ( email )
1000 Chastain Road
Kennesaw, GA 30144
United States
770-423-6181 (Phone)
Gaiyan Zhang
University of Missouri at St. Louis - College of Business Administration ( email )
One University Blvd
St. Louis, MO 63121
United States
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