On Loan Sales, Loan Contracting, and Lending Relationships

Posted: 22 Jun 2009

See all articles by Steven Drucker

Steven Drucker

Renaissance Technologies LLC - Meritage Group

Manju Puri

Duke University - Fuqua School of Business; NBER; FDIC

Multiple version iconThere are 2 versions of this paper

Date Written: July 2009

Abstract

This paper examines the secondary market for loan sales and, in particular, loan contract design as a mechanism to resolve informational issues in loan sales and associated costs and benefits. Using loan-level data, we find that sold loans contain additional covenants and more restrictive net worth covenants, particularly when agency and informational problems are more severe. Why do borrowers agree to incur the additional costs associated with loan sales? Our evidence suggests that these borrowers benefit through increased private debt availability. Further, loan sales go hand in hand with more durable lending relationships, suggesting that risk management aids continued relationship lending.

Keywords: G31, G32

Suggested Citation

Drucker, Steven and Puri, Manju, On Loan Sales, Loan Contracting, and Lending Relationships (July 2009). The Review of Financial Studies, Vol. 22, Issue 7, pp. 2635-2672, 2009. Available at SSRN: https://ssrn.com/abstract=1422405 or http://dx.doi.org/hhn067

Steven Drucker (Contact Author)

Renaissance Technologies LLC - Meritage Group

800 Third Ave
New York, NY 10022
United States

Manju Puri

Duke University - Fuqua School of Business ( email )

100 Fuqua Drive
Box 90120
Durham, NC 27708-0120
United States
919-660-7657 (Phone)

NBER

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

FDIC ( email )

550 17th Street NW
Washington, DC 20429
United States

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