The Importance of Individual-Pair Lending Relationships

45 Pages Posted: 8 Jul 2021 Last revised: 27 Apr 2022

See all articles by Omri Even-Tov

Omri Even-Tov

Haas School of Business - UC Berkeley

Xinlei Li

Hong Kong University of Science and Technology

Christopher D. Williams

University of Michigan, Stephen M. Ross School of Business

Hui Wang

Hong Kong University of Science and Technology

Date Written: June 30, 2021

Abstract

In this paper, we examine the significance and uniqueness of the individual-pair relationship cultivated through repeated loan interactions by the firm’s borrowing manager and the bank’s loan officer. Using a hand-collected dataset of borrowing manager and loan officer information, we find that individual-pair relationship loans reduce the cost of debt between 7-27 basis points. We also document that the economic impact of individual-pair lending relationships exists even when other types of relationships, e.g., institutional pairs, social ties, cultural proximity and gender, are taken into consideration. Lastly, we find evidence that individual-pair relationships are especially important when either the firm has a high level of information asymmetry, the bank is smaller, or loan officers have slimmer portfolios. Cumulatively, our results highlight the value of sustained professional engagement between two individuals in the lending process.

Keywords: Individual-Pair Lending Relationships, Asymmetric information, Professional connections, Bank lending, Debt Contracting, Cost of Debt

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

Suggested Citation

Even-Tov, Omri and Li, Xinlei and Williams, Christopher D. and Wang, Hui, The Importance of Individual-Pair Lending Relationships (June 30, 2021). Available at SSRN: https://ssrn.com/abstract=3877687 or http://dx.doi.org/10.2139/ssrn.3877687

Omri Even-Tov (Contact Author)

Haas School of Business - UC Berkeley ( email )

Haas School of Business
Berkeley, CA 94720
United States
3104302236 (Phone)

Xinlei Li

Hong Kong University of Science and Technology ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

Christopher D. Williams

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
(734)647-2842 (Phone)

Hui Wang

Hong Kong University of Science and Technology ( email )

Clear Water Bay
Kowloon
Hong Kong

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