Posted: 12 Dec 2011
Date Written: September 17, 2010
This paper investigates whether the benefits of bank–borrower relationships differ depending on three factors identified in the theoretical literature: verifiability of information, bank size and complexity, and bank competition. We extend the current literature by analyzing how relationship lending affects loan contract terms and credit availability in an empirical model that simultaneously accounts for all three of these factors. Based on Japanese survey data we find evidence that the benefits from stronger bank–borrower relationships in terms of credit availability are limited to smaller banks. However, when the benefits are measured as improved credit terms, we find little additional benefit, and in some cases increased cost, from stronger relationships for opaque borrowers and for borrowers who get funding from small banks. These latter findings suggest the possibility that relationship borrowers may suffer from capture effects.
Keywords: Banks, Small business, Bank–borrower relationships, Loan interest rate, Credit availability
JEL Classification: G21, L14, L13, L22, D82
Suggested Citation: Suggested Citation
Kano, Masaji and Uchida, Hirofumi and Udell, Gregory F. and Watanabe, Wako, Information Verifiability, Bank Organization, Bank Competition And Bank–Borrower Relationships (September 17, 2010). Journal of Banking and Finance, Vol. 35, No. 5, 2010. Available at SSRN: https://ssrn.com/abstract=1971075