Lender Trust and Bank Loan Contracts
55 Pages Posted: 5 Jun 2018 Last revised: 9 Sep 2019
Date Written: September 6, 2019
We examine the contractual implications of lender trust in bank loan contracts. We measure a lender’s trust using the average trust attitudes in the ancestral country of origin of its CEO. We find that banks with trusting CEOs charge lower loan rates. Furthermore, trusting lenders sanction borrowers more severely following breaches of trust. The results are identified within the same lender-borrower relationships and are robust to controlling for borrower trustworthiness. Overall, our results are consistent with CEOs setting the tone at the top and point to the role of trust as an informal contracting mechanism that mitigates information asymmetry problems.
Keywords: CEOs, Cultural Values, Trust, Financial Contracts
JEL Classification: G21, G32
Suggested Citation: Suggested Citation