Lending Relationships and Loan Contract Terms

AFA 2009 San Francisco Meetings Paper

Review of Financial Studies, Forthcoming

68 Pages Posted: 25 Mar 2008 Last revised: 29 Feb 2012

See all articles by Sreedhar T. Bharath

Sreedhar T. Bharath

Arizona State University (ASU) - Finance Department

Sandeep Dahiya

Georgetown University - Department of Finance

Anthony Saunders

New York University - Leonard N. Stern School of Business

Anand Srinivasan

National University of Singapore - Department of Finance

Date Written: July 28, 2008

Abstract

Does repeated borrowing from the same lender affect loan contract terms? We find that such borrowing translates into a 10 to 17 bps lowering of loan spreads. These results hold using multiple approaches (Propensity Score Matching, Instrumental Variables, and Treatment Effects Model) that control for the endogeneity of relationships. We find that relationships are especially valuable when borrower transparency is low and the moral hazard among lending syndicate members is high. We also provide a demarcation line between relationship and transactional lending. We find that spreads charged for relationship loans and non-relationship loans become indistinguishable if the borrower is in the top 30% when ranked by asset size. Similar dissipation of relationship benefits occurs if the borrower has public rated debt or is part of the S&P 500 index. We find that past relationships reduce collateral requirements. Relationships are also associated with shorter debt maturity especially for the lowest quality borrowers. Our results are robust to an estimation methodology which allows loan spread, collateral requirements, and loan maturity to be determined jointly using an instrumental variables approach. We also find relationship borrowers obtain larger loans (scaled by the borrower's asset size) compared to non-relationship borrowers. Our results imply that, even for firms that have multiple sources of outside financing, borrowing from a prior lender obtains better loan terms.

Keywords: Relationships, Banking, Collateral, Maturity

JEL Classification: G2, G21, G30, G32

Suggested Citation

Bharath, Sreedhar T. and Dahiya, Sandeep and Saunders, Anthony and Srinivasan, Anand, Lending Relationships and Loan Contract Terms (July 28, 2008). AFA 2009 San Francisco Meetings Paper, Review of Financial Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=891150 or http://dx.doi.org/10.2139/ssrn.891150

Sreedhar T. Bharath

Arizona State University (ASU) - Finance Department ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

Sandeep Dahiya

Georgetown University - Department of Finance ( email )

3700 O Street, NW
Washington, DC 20057
United States
202-687-3832 (Phone)

Anthony Saunders

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
9-190, MEC
New York, NY 10012-1126
United States
212-998-0711 (Phone)
212-995-4220 (Fax)

Anand Srinivasan (Contact Author)

National University of Singapore - Department of Finance ( email )

Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore

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