Relationship Lending and Lines of Credit in Small Firm Finance

JOURNAL OF BUSINESS, Vol 68 No 3, July 1995

Posted: 29 Aug 1998

See all articles by Allen N. Berger

Allen N. Berger

University of South Carolina - Darla Moore School of Business; Wharton Financial Institutions Center; European Banking Center

Gregory F. Udell

Indiana University - Kelley School of Business - Department of Finance

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Abstract

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

Suggested Citation

Berger, Allen N. and Udell, Gregory F., Relationship Lending and Lines of Credit in Small Firm Finance. JOURNAL OF BUSINESS, Vol 68 No 3, July 1995. Available at SSRN: https://ssrn.com/abstract=6345

Allen N. Berger (Contact Author)

University of South Carolina - Darla Moore School of Business ( email )

1705 College St
Francis M. Hipp Building
Columbia, SC 29208
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803-576-8440 (Phone)
803-777-6876 (Fax)

Wharton Financial Institutions Center

Philadelphia, PA 19104-6367
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European Banking Center

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Gregory F. Udell

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

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