Relationship Lending and Lines of Credit in Small Firm Finance

53 Pages Posted: 11 Nov 2008  

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

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Date Written: 1994

Abstract

This paper examines the role of relationship lending in small firm finance. We examine price and nonprice terms of bank lines of credit (L/C) extended to small firms. Our focus on bank L/Cs allows us toe examine a type of loan contract in which 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 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.

Suggested Citation

Berger, Allen N. and Udell, Gregory F., Relationship Lending and Lines of Credit in Small Firm Finance (1994). NYU Working Paper No. FIN-94-016. Available at SSRN: https://ssrn.com/abstract=1298836

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
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803-576-8440 (Phone)
803-777-6876 (Fax)

Wharton Financial Institutions Center

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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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