When Does Relationship Lending Start to Pay?
33 Pages Posted: 15 Jan 2016 Last revised: 19 Jan 2016
Date Written: January 13, 2016
This paper empirically characterizes relationship lending using data from more than 20,000 loans of a Spanish bank to small and medium enterprises (SMEs). The study analyzes the pricing determinants of loans to firms based on the entire previous bank-firm relationship, allowing for the identification of non-linear pricing patterns in the bank-firm relation. We show that firms only start capitalizing the gains of relationship lending when the relationship goes beyond two years. We uncover the role of the amortized amount of loans as a novel relevant relationship lending dimension in reducing loan rates. In our analysis, relationship lending significantly mitigates the increased costs of refinancing loans along two dimensions: Relationship age and having additional contracts – other than loans – with the bank.
Keywords: Asymmetric Information, Banks, Interest Rate spreads, Loans, Relationship Lending Dimensions
JEL Classification: D82, G30, G20, G21, G24, L14, N20
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