RFS Advance Access published online on October 7, 2009
Review of Financial Studies, doi:10.1093/rfs/hhp064
Lending Relationships and Loan Contract Terms
Ross School of Business, University of Michigan
McDonough School of Business, Georgetown University
Stern School of Business, New York University
Department of Finance, NUS Business School and Risk Management Institute, National University of Singapore
Send correspondence to Sreedhar T. Bharath, Ross School of Business, Department of Finance, University of Michigan, Suite R3332, Ann Arbor, MI 48109; telephone: (734) 763-0485. E-mail: sbharath{at}umich.edu
JEL Classification: D82, G3, G20, G21, G24, L14, N20
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Abstract |
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We find that repeated borrowing from the same lender translates into a 10–17 bps lowering of loan spreads and that relationships are especially valuable when borrower transparency is low. These results hold using multiple approaches (propensity score matching, instrumental variables, and treatment effects model) that control for the endogeneity of relationships. We also provide a demarcation line between relationship and transactional lending. Spreads charged for relationship loans and nonrelationship loans are statistically identical if the borrower is in the largest 30% by asset size; has public rated debt; or is part of the S&P 500 index. Past relationships reduce collateral requirements and are also associated with obtaining larger loans. Our results imply that, even for firms that have multiple sources of outside financing, borrowing from a prior lender obtains better loan terms.
Bharath acknowledges the research support of the Ross School of Business, University of Michigan. Srinivasan acknowledges the support of NUS research grants R-315-000-066-112 and R-315-000-066-133. The authors thank seminar participants at the University of Michigan, Boston College, Wharton School of Business, Indian School of Business, and Georgetown University. They thank conference participants at the Indian School of Business, participants at the Financial Intermediation Research Society conference 2008 in Anchorage, American Finance Association 2009 conference in San Francisco, Federal Reserve Bank of Chicago Conference, and 2006 Wharton Financial Intermediation Conference. They also thank Viral Acharya, Franklin Allen, Sumit Agarwal, Mark Carey, Doug Diamond, Mark Flannery, Anjan Thakor, and Tansel Yilmazer for their comments. All errors are those of the authors.