Do Lending Relationships Affect Corporate Financial Policies?

Abstract

This paper studies how lending relationships impact firms' capital structure and debt-equity financing decisions. I depart from existing literature on lending relationships in two respects: First, I build a panel dataset on firm-loan observations. Second, I account for the endogenous nature of the matching between borrowers and lenders through endogenous switching regression models. I find that lending relationships have a significant impact on leverage ratios, issuance choices and debt placement structures of relationship borrowers. In an analysis of leverage and issuance changes, I find a significant decrease in net debt issuing activity and debt ratios following lender-specific shocks to lending relationships. All in all, results show that lending relationships and debt exist as partial complements, rather than substitutes, alleviating the negative effects of agency problems and agency costs of information asymmetry.