The Importance of Individual-Pair Lending Relationships

Review of Accounting Studies Forthcoming

55 Pages Posted: 8 Jul 2021 Last revised: 23 Apr 2023

See all articles by Omri Even-Tov

Omri Even-Tov

Haas School of Business - UC Berkeley

Xinlei Li

UC Davis

Hui Wang

Renmin University of China - School of Business

Christopher D. Williams

University of Michigan, Stephen M. Ross School of Business

Date Written: June 30, 2021

Abstract

In this paper, we examine the significance and uniqueness of individual-pair relationships cultivated through repeated loan interactions. Using a hand-collected dataset compiled of borrowing manager and loan officer information, we find that individual-pair relationship loans are associated with a cost-of-debt reduction of between 7-13 basis points. We also document that the relationship has an economic impact even when other affiliations, e.g., institutional pairs, social ties, cultural proximity, and gender, are considered. Individual-pair relationships matter because they furnish lenders with useful soft information, especially when the firm has a poor hard information environment or when the bank and loan officer rely less on hard information. In addition, we find that individual-pair relationship loans have fewer rating downgrades, suggesting that accumulated soft information leads to better loan quality. Collectively, our results highlight the unique value of sustained professional engagement between two individuals in the lending process.

Keywords: Individual-pair lending relationships, Asymmetric information, Soft information, Professional connections, Bank lending, Debt contracting, Cost of debt

JEL Classification: G21, G30, D23, D82, J24

Suggested Citation

Even-Tov, Omri and Li, Xinlei and Wang, Hui and Williams, Christopher D., The Importance of Individual-Pair Lending Relationships (June 30, 2021). Review of Accounting Studies Forthcoming, Available at SSRN: https://ssrn.com/abstract=3877687 or http://dx.doi.org/10.2139/ssrn.3877687

Omri Even-Tov (Contact Author)

Haas School of Business - UC Berkeley ( email )

Haas School of Business
Berkeley, CA 94720
United States
3104302236 (Phone)

Xinlei Li

UC Davis ( email )

Hui Wang

Renmin University of China - School of Business ( email )

Beijing
China

Christopher D. Williams

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
(734)647-2842 (Phone)

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
290
Abstract Views
1,380
Rank
191,631
PlumX Metrics