Abstract

AbstractWe relate credit risk and owners’ personal guarantees to bank loan maturities during the global financial crisis. The findings, which remain robust to reverse causality, show that firms rated as low risk, with a strong relationship with the bank, whose owners provided personal guarantees and with large loan sizes obtained longer maturities. Banks with larger nonperforming loans provided loans with shorter maturities. Firms with low‐ and high‐risk ratings that provided owners’ personal guarantees obtained longer maturities. These findings shed additional light on the relationship between risk and loan maturities and the role of personal guarantees in reducing information asymmetries.

Highlights

  • The financing of small firms became a matter of policy interest during the global financial crisis as the failure of these firms could trigger a wave of bankruptcies and unemployment, further endangering the recovery of ailing economies

  • We report the findings for the first stage (Column III.1) and second stage (Column III.2) of the 2-SLS instrumented with prior default in Column III

  • We report the findings for the ordinary least squares (OLS) with the full set of variables in Column I.1, and findings for the first-stage (Column I.2.1) and second-stage (Column I.2.2) of the 2-SLS instrumented with prior default in Column I.2

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Summary

Introduction

The financing of small firms became a matter of policy interest during the global financial crisis (financial crisis) as the failure of these firms could trigger a wave of bankruptcies and unemployment, further endangering the recovery of ailing economies. At the time of the crisis, monetary authorities designed quantitative easing programs aimed at smoothing economic recovery, and financial authorities designed policies aimed at facilitating access to bank loans by small firms and reducing their failures rates. A number of studies show that loan maturities matter to both firms and banks. Shorter maturities restrict long-term capital expenditures (González, 2015) and increase tension due to regular renegotiating to roll over the loans and their terms (Bartoli et al, 2013). (shorter) loan maturities facilitate and increase the efficiency of monitoring (Berlin and Mester, 1992) and reduce the minimum capital required by regulators and supervisors (Kirschenmann and Norden, 2012)

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