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

See all articles by Larissa Schäfer

Larissa Schäfer

Frankfurt School of Finance & Management

Date Written: September 11, 2018

Abstract

Do relationship banks help fi rms 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 fi rm 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 o er 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

Schäfer, Larissa, Forgive but not Forget: The Behavior of Relationship Banks When Firms are in Distress (September 11, 2018). Review of Finance, forthcoming. Available at SSRN: https://ssrn.com/abstract=2608950 or http://dx.doi.org/10.2139/ssrn.2608950

Larissa Schäfer (Contact Author)

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

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