On Loan Sales, Loan Contracting, and Lending Relationships

FDIC Center for Financial Research Working Paper No. WP 2007-04

46 Pages Posted: 3 Aug 2006

See all articles by Steven Drucker

Steven Drucker

Renaissance Technologies LLC - Meritage Group

Manju Puri

Duke University - Fuqua School of Business; NBER; FDIC

Multiple version iconThere are 2 versions of this paper

Date Written: March 2007


This paper examines the secondary market for loan sales, focusing on whether loan contract design can reduce agency problems in loan sales and the benefits and costs to corporate borrowers. We argue that covenants aid loan sales by protecting the loan buyer from potential losses caused by informationally-advantaged borrowers and loan sellers. Using loan-level data, we find that sold loans contain more restrictive covenant packages, particularly when agency problems are more severe. Why do borrowers agree to incur the additional costs associated with loan sales? We show that borrowers whose loans are sold have high leverage ratios, and loan sales increase their access to loans. Also, contrary to concerns that loan sales weaken lending relationships, we find more durable lending relationships when loans are sold.

Keywords: Loan Sales, Covenants, Financial Contracting, Lending

JEL Classification: G21, G32

Suggested Citation

Drucker, Steven and Puri, Manju, On Loan Sales, Loan Contracting, and Lending Relationships (March 2007). Available at SSRN: https://ssrn.com/abstract=920877 or http://dx.doi.org/10.2139/ssrn.920877

Steven Drucker

Renaissance Technologies LLC - Meritage Group

800 Third Ave
New York, NY 10022
United States

Manju Puri (Contact Author)

Duke University - Fuqua School of Business ( email )

100 Fuqua Drive
Box 90120
Durham, NC 27708-0120
United States
919-660-7657 (Phone)


1050 Massachusetts Avenue
Cambridge, MA 02138
United States

FDIC ( email )

550 17th Street NW
Washington, DC 20429
United States

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