Friends with Money

61 Pages Posted: 17 Mar 2010

See all articles by Joseph Engelberg

Joseph Engelberg

University of California, San Diego (UCSD) - Rady School of Management

Pengjie Gao

University of Notre Dame - Mendoza College of Business

Christopher A. Parsons

Foster School of Business, University of Washington

Date Written: February 8, 2010

Abstract

We explore whether personal connections between employees at firms and banks influence lending and borrowing practices. Such firm-bank connections predict large concessions in interest rates, comparable to single shifts in credit ratings. Personal relationships also predict larger loan amounts and fewer restrictive covenants. We find no evidence that these terms reflect “sweetheart deals.” Subsequent firm performance (e.g., future credit ratings and stock returns) improves after completing a “connected” bank deal, suggesting social networks between banks and firms either lead to better information flow ex ante or better monitoring ex post.

Keywords: social networks, lending relationships, credit ratings

Suggested Citation

Engelberg, Joseph and Gao, Pengjie and Parsons, Christopher A., Friends with Money (February 8, 2010). Available at SSRN: https://ssrn.com/abstract=1572386 or http://dx.doi.org/10.2139/ssrn.1572386

Joseph Engelberg (Contact Author)

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

Pengjie Gao

University of Notre Dame - Mendoza College of Business ( email )

246 Mendoza College of Business
Notre Dame, IN 46556-5646
United States
(574) 631-8048 (Phone)

HOME PAGE: http://​sites.google.com/site/gpengjie/

Christopher A. Parsons

Foster School of Business, University of Washington ( email )

PACCAR HALL
4273 E Stevens Way NE
Seattle, WA 98195
United States

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