Non-Information Asymmetry Benefits of Relationship Lending

57 Pages Posted: 9 Oct 2020 Last revised: 30 Mar 2022

See all articles by Daniel Rabetti

Daniel Rabetti

Tel Aviv University - Coller School of Management

Date Written: March 2022

Abstract

Prior studies focus on information asymmetry as the primary source of relationship lending benefits. This study assesses the benefits of relationship lending in the Paycheck Protection Program (PPP), wherein loan credit risk plays nearly no role in the lending decision. Relationship firms, those that receive PPP loans from lenders with whom they have a past relationship, receive economically significantly larger loans and faster approvals than transaction firms, those without such relationships. PPP lenders tend to prioritize relationship firms mainly due to concerns arising from the increased risk of default associated with borrowers' pre-crisis debt---in line with evergreening motivation. However, these benefits come with costs. Firms are more likely to violate the program's rules when a relationship exists.

Keywords: Relationship Lending, Paycheck Protection Program, COVID-19 Crisis

JEL Classification: G01, G21, G38, H32, H81, H84

Suggested Citation

Rabetti, Daniel, Non-Information Asymmetry Benefits of Relationship Lending (March 2022). Available at SSRN: https://ssrn.com/abstract=3701587 or http://dx.doi.org/10.2139/ssrn.3701587

Daniel Rabetti (Contact Author)

Tel Aviv University - Coller School of Management ( email )

Ramat Aviv
Tel-Aviv, 6997801
Israel
972-54-9107234 (Phone)

HOME PAGE: http://https://en-coller.tau.ac.il/

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