Lines of Credit and Relationship Lending in Small Firm Finance

Jerome Levy Economics Institute Working Paper No. 113

39 Pages Posted: 13 Oct 1998

See all articles by Allen N. Berger

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

Date Written: April 1994

Abstract

This paper examines the role of relationship lending using a data set on small firm finance. We specifically examine price and nonprice terms of commercial bank lines of credit (L/C) extended to small firms. Our focus on bank L/Cs allows us to examine a type of loan contract where 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 tend to 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.

JEL Classification: G21, L14

Suggested Citation

Berger, Allen N. and Udell, Gregory F., Lines of Credit and Relationship Lending in Small Firm Finance (April 1994). Jerome Levy Economics Institute Working Paper No. 113. Available at SSRN: https://ssrn.com/abstract=124708 or http://dx.doi.org/10.2139/ssrn.124708

Allen N. Berger (Contact Author)

University of South Carolina - Darla Moore School of Business ( email )

1705 College St
Francis M. Hipp Building
Columbia, SC 29208
United States
803-576-8440 (Phone)
803-777-6876 (Fax)

Wharton Financial Institutions Center

Philadelphia, PA 19104-6367
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European Banking Center

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Gregory F. Udell

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

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