The Value of Lending Relationships When Creditors are in Control
45 Pages Posted: 13 Feb 2018 Last revised: 9 Aug 2019
Date Written: January 25, 2018
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: Suggested Citation