The Effects of Firm Network on Banks' Portfolio Consideration

45 Pages Posted: 27 Aug 2016

See all articles by Janet Gao

Janet Gao

Indiana University - Kelley School of Business

Date Written: March 25, 2015

Abstract

Managing the quality of a loan portfolio is an important factor in bank lending decisions, especially when lending to a firm generates "credit synergy" with the bank's existing borrowers through their input-output connections. In this paper, I examine whether a firm's connection with a bank's loan portfolio can affect the borrowing conditions offered by that bank to the firm. Using a network based on extensive customer-supplier relations to measure interfirm connections, I show that firms that are closely connected with a bank's loan portfolio are more likely to receive loans from the bank in the future and will receive lower interest rate spreads. Using bank mergers as exogenous shocks to bank-firm connections, I show that a firm's increased connection with a bank following a merger leads to larger reductions in loan spreads offered by the bank.

Keywords: firm network, syndicate loans, bank portfolio, supply chain

JEL Classification: G21, G30, G32

Suggested Citation

Gao, Janet, The Effects of Firm Network on Banks' Portfolio Consideration (March 25, 2015). Kelley School of Business Research Paper No. 16-63. Available at SSRN: https://ssrn.com/abstract=2829988 or http://dx.doi.org/10.2139/ssrn.2829988

Janet Gao (Contact Author)

Indiana University - Kelley School of Business ( email )

1309 East Tenth Street
Indianapolis, IN 47405-1701
United States

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