The Importance of Individual-Pair Lending Relationships

Abstract

In this paper, we examine the significance and uniqueness of individual-pair relationships cultivated through repeated loan interactions. Using a hand-collected dataset compiled of borrowing manager and loan officer information, we find that individual-pair relationship loans are associated with a cost-of-debt reduction of between 7-13 basis points. We also document that the relationship has an economic impact even when other affiliations, e.g., institutional pairs, social ties, cultural proximity, and gender, are considered. Individual-pair relationships matter because they furnish lenders with useful soft information, especially when the firm has a poor hard information environment or when the bank and loan officer rely less on hard information. In addition, we find that individual-pair relationship loans have fewer rating downgrades, suggesting that accumulated soft information leads to better loan quality. Collectively, our results highlight the unique value of sustained professional engagement between two individuals in the lending process.

Keywords: Individual-pair lending relationships, Asymmetric information, Soft information, Professional connections, Bank lending, Debt contracting, Cost of debt

JEL Classification: G21, G30, D23, D82, J24