The Importance of Individual-Pair Lending Relationships
45 Pages Posted: 8 Jul 2021 Last revised: 27 Apr 2022
Date Written: June 30, 2021
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: Suggested Citation