The Value of Lending Relationships When Creditors are in Control

45 Pages Posted: 13 Feb 2018 Last revised: 9 Aug 2019

See all articles by Jan Keil

Jan Keil

Humboldt Universität zu Berlin

Date Written: January 25, 2018

Abstract

Research has shown that relationship banking matters for borrowers. In this article I utilize a regression discontinuity design to provide evidence that a concrete channel, the reallocation of control rights to creditors following a covenant violation, explains some positive effects relationship lending has on borrowers. Investment experiences a smaller reduction and the likelihood of a company exit increases less dramatically when there are well developed relationships. Exploring which exact lender actions are responsible for these results, I find that relationship banks are more willing to renegotiate loans, extend maturities, ramp up volumes and grant covenant waivers upon violations.

Keywords: Relationship banking, covenant violations, regression discontinuity

JEL Classification: G21,G32

Suggested Citation

Keil, Jan, The Value of Lending Relationships When Creditors are in Control (January 25, 2018). Available at SSRN: https://ssrn.com/abstract=3109202

Jan Keil (Contact Author)

Humboldt Universität zu Berlin ( email )

Berlin
Germany

HOME PAGE: http://www.jankeil.com

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