Lender Trust and Bank Loan Contracts

55 Pages Posted: 5 Jun 2018 Last revised: 9 Sep 2019

See all articles by Jens Hagendorff

Jens Hagendorff

University of Edinburgh - Business School

Sonya S. Lim

DePaul University - Department of Finance

Duc Duy Nguyen

King's College London

Date Written: September 6, 2019

Abstract

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

Hagendorff, Jens and Lim, Sonya S. and Nguyen, Duc Duy, Lender Trust and Bank Loan Contracts (September 6, 2019). Available at SSRN: https://ssrn.com/abstract=3183155 or http://dx.doi.org/10.2139/ssrn.3183155

Jens Hagendorff

University of Edinburgh - Business School ( email )

University of Edinburgh
29 Buccleuch Place
Edinburgh, Scotland EH8 9JS
UNITED KINGDOM

Sonya S. Lim

DePaul University - Department of Finance ( email )

1 East Jackson Blvd.
Chicago, IL 60604-2287
United States

HOME PAGE: http://sites.google.com/site/sonyalim/

Duc Duy Nguyen (Contact Author)

King's College London ( email )

Strand
London, England WC2R 2LS
United Kingdom

HOME PAGE: http://sites.google.com/site/louisnguyen6589/home

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