Relationship Lending and Lines of Credit in Small Firm Finance
JOURNAL OF BUSINESS, Vol 68 No 3, July 1995
Posted: 29 Aug 1998
This article examines the role of relationship lending in small firm finance. We examine price and nonprice terms of bank lines of credit (L/C) extended to small firms. Our focus on bank L/Cs allows us to examine a type of loan contract in which the bank-borrower relationship is likely to be an important mechanism for solving asymmetric information problems associated with financing small enterprises. We find that borrowers with longer banking relationships pay lower interest rates and are less likely to pledge collateral. These results are consistent with theoretical arguments that relationship lending generates valuable information about borrower quality.
JEL Classification: G21, G28
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