A Multistage Model of Loans and the Role of Relationships

Financial Management, Forthcoming

55 Pages Posted: 2 Sep 2008

Multiple version iconThere are 2 versions of this paper

Date Written: September 2, 2008


We develop a multistage model of the loan granting process to understand the contradictory findings of the existing literature on bank-borrower relationships, credit availability, and loan rates. Upon estimating our model with the 1993, 1998, and 2003 versions of the Survey of Small Business Finances data set, we find that relationships matter in a borrower's decision whether to apply for a loan and in the loan approval/rejection decision by the financial institution. However, the effect of relationships on loan rates depends on the prevailing economic climate. While firms with pre-existing relationships obtain credit at lower rates during periods of economic expansion, loan rates are not negatively correlated with pre-existing relationships during periods of economic recession.

Keywords: relationships, loan, small business, adverse selection, moral hazard, credit rationing

JEL Classification: C30, G20

Suggested Citation

Chakravarty, Sugato and Yilmazer, Tansel, A Multistage Model of Loans and the Role of Relationships (September 2, 2008). Financial Management, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1262415

Sugato Chakravarty (Contact Author)

Purdue University ( email )

Consumer Sciences
1262 Matthews Hall Rm 214F
West Lafayette, IN 47906
United States
765-494-6427 (Phone)
765-494-0869 (Fax)

HOME PAGE: http://web.ics.purdue.edu/~sugato

Tansel Yilmazer

Ohio State University ( email )

Department of Consumer Sciences
1787 Neil Avenue, 265E Campbell Hall
Columbus, OH 43210
United States

HOME PAGE: http://pincock-yilmazer.com/tansel/

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