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Fishing with Pearls: The Value of Lending Relationships with Prestigious Firms

54 Pages Posted: 16 Dec 2015 Last revised: 16 Nov 2017

Alexander Muermann

WU (Vienna University of Economics and Business); Vienna Graduate School of Finance (VGSF)

Thomas Rauter

WU (Vienna University of Economics and Business)

Christoph Scheuch

Vienna Graduate School of Finance (VGSF); WU (Vienna University of Economics and Business)

Date Written: November 15, 2017

Abstract

We provide novel evidence of banks establishing lending relationships with prestigious firms to signal their quality and attract future business. Using survey data on firm-level prestige, we show that lenders compete more intensely for prestigious borrowers and offer lower upfront fees to initiate lending relationships with prestigious firms. We also find that banks expand their lending after winning prestigious clients. Prestigious firms benefit from these relations as they face lower costs of borrowing even though prestige has no predictive power for credit risk. Our results are robust to matched sample analyses and a regression discontinuity design.

Keywords: Lending Relationships; Firm Prestige; Bank Incentives

JEL Classification: G20; G21; G30; G32; L14; N20

Suggested Citation

Muermann, Alexander and Rauter, Thomas and Scheuch, Christoph, Fishing with Pearls: The Value of Lending Relationships with Prestigious Firms (November 15, 2017). Available at SSRN: https://ssrn.com/abstract=2703343 or http://dx.doi.org/10.2139/ssrn.2703343

Alexander Muermann

WU (Vienna University of Economics and Business) ( email )

Welthandelsplatz 1
A - 1020 Wien
Austria
+43 1 31336 4948 (Phone)
+43 1 31336 90 4948 (Fax)

Vienna Graduate School of Finance (VGSF) ( email )

Welthandelsplatz 1
A - 1020 Wien
Austria

Thomas Rauter (Contact Author)

WU (Vienna University of Economics and Business) ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

HOME PAGE: http://www.thomas-rauter.com

Christoph Scheuch

Vienna Graduate School of Finance (VGSF)

Welthandelsplatz 1
Vienna, A-1020
Austria

HOME PAGE: http://ckscheuch.github.io

WU (Vienna University of Economics and Business) ( email )

Welthandelsplatz 1
Vienna, A-1020
Austria

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