Distance, Lending Relationships and Competition

63 Pages Posted: 1 Aug 2003

See all articles by Hans Degryse

Hans Degryse

KU Leuven, Department Accounting, Finance and Insurance; Centre for Economic Policy Research (CEPR)

Steven Ongena

University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR)

Date Written: October 1, 2002

Abstract

A recent string of theoretical papers highlights the importance of geographical distance in explaining loan rates for small firms. Lenders located in the vicinity of small firms face significantly lower transportation and monitoring costs, and hence considerable market power, if competing financiers are located relatively far from the borrowing firms. We directly study the effect on loan conditions of geographical distance between firms, the lending bank, and all other banks in the vicinity. For our study, we employ detailed contract information from more than 15,000 bank loans to small firms and control for relevant relationship, loan contract, bank branch, firm, and regional characteristics. We report the first comprehensive evidence on the occurrence of spatial price discrimination in bank lending. Loan rates decrease in the distance between the firm and the lending bank and similarly increase in the distance between the firm and competing banks. The effect of distance on the loan rate is statistically significant and economically relevant, is robust to changes in model specifications and variable definitions, and is seemingly not driven by the modest changes over time in lending technology we infer. We deduce that transportation costs are causing the spatial price discrimination we observe.

Keywords: spatial price discrimination, bank credit, lending relationships

Suggested Citation

Degryse, Hans and Ongena, Steven R. G., Distance, Lending Relationships and Competition (October 1, 2002). EFA 2003 Annual Conference Paper No. 260. Available at SSRN: https://ssrn.com/abstract=424006 or http://dx.doi.org/10.2139/ssrn.424006

Hans Degryse (Contact Author)

KU Leuven, Department Accounting, Finance and Insurance ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Steven R. G. Ongena

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

Swiss Finance Institute

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

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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