Non-Information Asymmetry Benefits of Relationship Lending
57 Pages Posted: 9 Oct 2020 Last revised: 30 Mar 2022
Date Written: March 2022
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: Suggested Citation