Relationship Capital and Financing Decisions

53 Pages Posted: 19 Jul 2021 Last revised: 5 Aug 2021

See all articles by Thomas Geelen

Thomas Geelen

Copenhagen Business School - Department of Finance; Danish Finance Institute

Erwan Morellec

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute

Natalia Rostova

Swiss Finance Institute; Ecole Polytechnique Fédérale de Lausanne

Date Written: July 16, 2021

Abstract

Lending relationships matter for firm financing. In a model of debt dynamics, we study how lending relationships are formed and how they impact leverage and debt maturity choices. 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 when relationship quality is sufficiently high. The maturity of debt contracts issued to non-relationship investors is higher than that of relationship investors. Negative shocks to relationship lenders drastically affect the financing choices of firms with intermediate relationship quality.

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 (July 16, 2021). Swiss Finance Institute Research Paper No. 21-46, Available at SSRN: https://ssrn.com/abstract=3888425 or http://dx.doi.org/10.2139/ssrn.3888425

Thomas Geelen

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

Ecole Polytechnique Fédérale de Lausanne ( email )

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

Swiss Finance Institute ( email )

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

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