Abstract
This paper provides new evidence on how lending relationships impact firms’ financing and investment decisions. I find that lending relationships have a significant impact on leverage ratios, issuance choices, and the investment structures of relationship borrowers. The influence of relationships is heightened for financially constrained firms. I find a significant decrease in leverage, net debt issuing, and investment activity in the aftermath of lender‐specific shocks to lending relationships, including announcements of bank write‐downs and downgrades in banks’ credit ratings. My findings are robust to controlling for confounding effects that might arise due to unobserved demand and relationship changes.
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