The Choice Between Arm's-Length and Relationship Debt: Evidence from eLoans

49 Pages Posted: 25 Nov 2008

See all articles by Sumit Agarwal

Sumit Agarwal

National University of Singapore

Robert B. H. Hauswald

American University - Department of Finance and Real Estate

Multiple version iconThere are 2 versions of this paper

Date Written: November 24, 2008

Abstract

Using a unique sample of comparable online and in-person loan transactions, we study the determinants of arm's-length and inside lending focusing on the differential information content across debt types. We find that soft private information primarily underlies relationship lending whereas hard public information drives arm's-length debt. The bank's relative reliance on public or private information in lending decisions then determines trade-offs between the availability and pricing of credit across loan types. Consistent with economic theory, relationship debt leads to informational capture and higher interest rates but is more readily available whereas the opposite holds true for transactional debt. In their choice of loan type, lender switching, and default behavior firms, however, anticipate the inside bank's strategic use of information and act accordingly.

Keywords: Relationship Lending, Internet Lending, Soft Information, Banking, Small Business Loans

JEL Classification: G21, L11, L14, D44

Suggested Citation

Agarwal, Sumit and Hauswald, Robert B.H., The Choice Between Arm's-Length and Relationship Debt: Evidence from eLoans (November 24, 2008). FRB of Chicago Working Paper No. 2008-10. Available at SSRN: https://ssrn.com/abstract=1306455 or http://dx.doi.org/10.2139/ssrn.1306455

Sumit Agarwal (Contact Author)

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (Phone)

HOME PAGE: http://www.ushakrisna.com

Robert B.H. Hauswald

American University - Department of Finance and Real Estate ( email )

Kogod School of Business
4400 Massachusetts Ave., N.W.
Washington, DC 20016-8044
United States
202-885-1996 (Phone)
202-885-1946 (Fax)

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