Lending Relationships Along Ownership Lines: Institutional Cross-Ownership and Bank Loan Contracts

Abstract

We find that banking relationships built through institutional cross-ownership influence the granting of loans as well as loan contract terms. Specifically, firms newly added to institutional cross-owners’ portfolios are more likely to borrow from banks that previously issued loans to other firms with the same institutional cross-ownership. These related banks also charge lower loan interest spreads than other banks issuing loans to the same borrower over the same period, and this effect is stronger for borrowers with high information asymmetry, low accounting quality, more financial constraints, and with dedicated institutional cross-owners. Both the lending probability and interest spread effects are robust to different fixed effects specifications as well as to a difference-in-differences analysis. Overall, our study provides new insights on the role of institutional cross-ownership in the formation of lending relationships.

Keywords: Debt contracting, cross-ownership, lending relationships

JEL Classification: G10, G21, M41