RFS Advance Access published online on October 20, 2009
Review of Financial Studies, doi:10.1093/rfs/hhp080
Lending Relationships and Information Rents: Do Banks Exploit Their Information Advantages?
McIntire School of Commerce, University of Virginia
Send correspondence to Carola Schenone, McIntire School of Commerce, University of Virginia, Rouss and Robertson Halls, 125 Ruppel Drive, Charlottesville, VA 22903; telephone: (434) 924-4184; fax: (434) 924-7074. E-mail: schenone{at}virginia.edu
JEL Classification: D82, G21, G24, G32
 |
Abstract |
|---|
In the process of lending to a firm, a bank acquires proprietary firm-specific information that is unavailable to nonlenders. This asymmetric evolution of information between lenders and prospective lenders grants the former an information monopoly. This article empirically investigates whether relationship banks exploit this advantage by charging higher interest rates than those that would prevail were all banks symmetrically informed. My identification strategy hinges on the notion that large information shocks that level the playing field among banks erode the relationship bank’s information monopoly. I use the borrower’s initial public offering (IPO) as such an information-releasing event, and build a panel dataset in which the unit of observation is a firm’s lending relationships before and after its IPO. Prior to a firm’s IPO, I find a U-shaped relation between borrowing rates and relationship intensity. After the IPO, interest rates are decreasing in relationship intensity. Furthermore, mean interest rates drop after an IPO. The results are robust to firm and loan-year fixed effects, and to controls for firm leverage pre- and post-IPO. Thus, the reported interest rate pattern is clean of any confounding effects that might arise from changes in financial risk.
I am grateful to Allen Berger, Federico Ciliberto, Matt Clayton, Mark Flannery, Paolo Fulghieri, Rick Green, Robert Hauswald, Joel Houston, Ravi Jagannathan, Wei Liu, Felicia Marston, Kieron Meagher, Mitchell Petersen, Manju Puri, David C. Smith, Greg Nini, Jay Ritter, Claire Rosenfeld, Patrik Sandås, Phil Strahan, Anjan Thakor, Bill Wilhelm, and Andy Winton for helpful discussions. I also thank Jörg Rocholl for his discussion at the 2007 Western Finance Association Meetings in Montana, and Ayako Yasuda for her discussion at the Fifth Corporate Finance Conference in Olin. I benefited from suggestions by seminar participants at the Federal Reserve Board, the New York Federal Reserve Bank, the University of Florida–Gainesville, the Stockholm School of Economics, the Securities and Exchange Commission, American University, the University of Ohio, and the Norwegian School of Management in Oslo; the 2007 WFA Meetings in Montana; the 44th Annual Bank Structure and Competition Conference of the Federal Reserve Bank of Chicago; and the Fifth Annual Conference in Corporate Finance at Olin, Washington University. Evan Kwiatkowski and Katie Rohyans provided outstanding research assistance. Mary Summers provided outstanding editorial assistance. I gratefully acknowledge financial support from the Pettit-DeMong Faculty Fellowship Fund and the Walker Summer Research Grant from the McIntire School of Commerce at the University of Virginia. All errors are my own.