42 Pages Posted: 4 Mar 2007
Date Written: March 2007
The advent of online lending offers the opportunity to clearly identify transactional and relationship debt in terms of the firm's chosen mode of interaction with the bank. Using a unique data set of comparable online and in-person loan transactions, we study the determinants of arm's-length and relationship transactions focusing on the differential information content of each lending mode and the resulting strategic interaction. We find that private information drives relationship-debt transactions whereas public information primarily affects arm's-length lending. Consistent with economic theory the bank's relative reliance on public or private information then determines the predicted trade-off between availability and pricing of credit across loan types. Transactional loans are less readily available but offer lower rates whereas the opposite is true for relationship debt. In their choice of loan type, lender switching, and default behavior firms anticipate the bank's strategic use of information and behave accordingly.
Keywords: Relationship lending, transactional debt, differential information, online lending
JEL Classification: G21, L11, L14, D44
Suggested Citation: Suggested Citation
Agarwal, Sumit and Hauswald, Robert B. H., The Choice between Arm's-Length and Relationship Debt: Evidence from Eloans (March 2007). ; AFA 2008 New Orleans Meetings Paper. Available at SSRN: https://ssrn.com/abstract=968010 or http://dx.doi.org/10.2139/ssrn.968010