Forgive but not Forget: The Behavior of Relationship Banks When Firms are in Distress
Review of Finance, forthcoming
63 Pages Posted: 22 May 2015 Last revised: 25 Oct 2018
Date Written: September 11, 2018
Do relationship banks help firms in distress? Combining a survey-based measure of relationship lending with unique credit registry data, I examine the effect of relationship lending on loan performance. I find that the same firm in the same time period is more likely to become delinquent on a relationship-based loan relative to a transaction-based loan. Higher delinquencies do not, however, result in more defaults or less loan recoveries for relationship banks when loans mature relative to transactional banks. Conditional on past delinquencies, relationship banks are more likely to oer follow-up nancing and extract rents. Consistent with theory, relationship banks tolerate temporarily bad results, yet extract rents and secure future business in return. The paper provides new empirical evidence for rent extraction by relationship banks that have been lenient to distressed firms in the past.
Keywords: Bank Financing, Relationship Lending, Loan Performance, Firm Distress, Liquidity Insurance
JEL Classification: G21, G30
Suggested Citation: Suggested Citation