Do Relationship Lenders Manage Loans Differently?
49 Pages Posted: 20 Feb 2019 Last revised: 9 Aug 2019
Date Written: September 1, 2018
Relationship banks manage loans differently than transaction lenders. This constitutes an own channel through which lending relationships affect borrowers. Analyzing 1.5 million observations and introducing borrower-quarter, lender-quarter, and lender-borrower fixed effects, I show that loan amendments are more likely for contracts signed by relationship lenders. Such formalized contract renegotiations are largely beneficial for borrowers. To investigate differences in informal loan administration policies, I analyze situations in which covenant violations shift control rights to creditors. Utilizing a regression discontinuity design and instrumenting lending relationships with lender-borrower distances, I find reductions in investment lender-borrower relationships
Keywords: lending relationships, loan administration, credit contract amendments, technical default
JEL Classification: G20
Suggested Citation: Suggested Citation