The Choice between Arm's-Length and Relationship Debt: Evidence from Eloans

Abstract:     
The advent of online lending offers the opportunity to clearly identify transactional and relationship debt in terms of the firm's chosen mode of interaction with the bank. Using a unique data set of comparable online and in-person loan transactions, we study the determinants of arm's-length and relationship transactions focusing on the differential information content of each lending mode and the resulting strategic interaction. We find that private information drives relationship-debt transactions whereas public information primarily affects arm's-length lending. Consistent with economic theory the bank's relative reliance on public or private information then determines the predicted trade-off between availability and pricing of credit across loan types. Transactional loans are less readily available but offer lower rates whereas the opposite is true for relationship debt. In their choice of loan type, lender switching, and default behavior firms anticipate the bank's strategic use of information and behave accordingly.

Number of Pages in PDF File: 42

Keywords: Relationship lending, transactional debt, differential information, online lending

JEL Classification: G21, L11, L14, D44

working papers series