Friends with Money
61 Pages Posted: 17 Mar 2010
Date Written: February 8, 2010
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
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