Relationship Capital and Financing Decisions

Swiss Finance Institute Research Paper No. 21-46

Forthcoming, Management Science



66 Pages Posted: 19 Jul 2021 Last revised: 6 May 2024

See all articles by Thomas Geelen

Thomas Geelen

Pennsylvania State University - Smeal College of Business; Copenhagen Business School - Department of Finance; Danish Finance Institute

Erwan Morellec

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute

Natalia Rostova

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute

Date Written: August 05, 2024

Abstract

Lending relationships matter for firm financing. In a model of debt dynamics, we study how lending relationships are formed and how they impact the joint choice of leverage and debt maturity, thereby rationalizing recent empirical findings and generating new predictions. In the model, lending relationships evolve through repeated interactions between firms and debt investors. Stronger lending relationships lead firms to adopt higher leverage ratios, issue longer term debt, and raise funds from non-relationship lenders via syndicated loans or bonds issues when relationship quality is sufficiently high. Debt contracts involving non-relationship investors have longer maturity than those exclusively issued to relationship investors.

Keywords: relationship lending, capital structure, debt maturity, default

JEL Classification: G20, G32, G33

Suggested Citation

Geelen, Thomas and Morellec, Erwan and Rostova, Natalia and Rostova, Natalia, Relationship Capital and Financing Decisions (August 05, 2024). Swiss Finance Institute Research Paper No. 21-46, Forthcoming, Management Science,
,
, Available at SSRN: https://ssrn.com/abstract=3888425 or http://dx.doi.org/10.2139/ssrn.3888425

Thomas Geelen

Pennsylvania State University - Smeal College of Business ( email )

University Park, PA 16802
United States

Copenhagen Business School - Department of Finance

Solbjerg Plads 3
Copenhagen, Frederiksberg 2000
Denmark

Danish Finance Institute ( email )

Erwan Morellec (Contact Author)

Ecole Polytechnique Fédérale de Lausanne ( email )

College of Management
Extranef Quartier UNIL-Dorigny
1015 Lausanne, CH-1015
Switzerland

HOME PAGE: http://sfi.epfl.ch/

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Natalia Rostova

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Ecole Polytechnique Fédérale de Lausanne ( email )

Quartier UNIL-Chamberonne
Bâtiment Extranef, # 127
Lausanne, Vaud CH-1015
Switzerland

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