Concierge Treatment from Banks: Evidence from the Paycheck Protection Program
44 Pages Posted: 2 Feb 2021 Last revised: 10 Mar 2021
Date Written: February 21, 2021
We use the subset of Paycheck Protection Program (PPP) loans that were extended to public firms as a laboratory to separate between favoritism and informational advantages in lending relationships. Because PPP loans are guaranteed by the government and banks do not need to carefully screen borrowers, this setting reduces information frictions, allowing us to quantify the effect of favoritism. We find that firms with prior lending relationships or personal connections to bank executives are more likely to obtain PPP loans. Consistent with favoritism, the role of connections weakens when monitoring is tighter, and, moreover, connected firms are forced to return their loans. Overall, we offer clean estimates of the role of favoritism in bank lending.
Keywords: COVID-19, credit, Paycheck Protection Program (PPP), agency theory, favoritism, relationship lending
JEL Classification: G21, G28, G32, G38
Suggested Citation: Suggested Citation