Marrying and Breaking Up: Firms and their Relationship Lenders

Abstract

This study analyzes the circumstances under which firms choose to have a relationship lender and under which firms switch their relationship lender. Relationship lending is measured by the largest lender’s share of debt. Our study is based on a unique dataset for Germany with more than 13,000 observations. We find that young firms and well capitalized firms are more likely to concentrate their borrowing on one bank. These two groups of firms are also more likely to switch their relationship lender. Moreover, firms concentrate their borrowing more heavily on banks with a high share of core deposits. Small firms are also more likely to stay with relationship lenders with a high share of core deposits. Finally, the proportion of debt borrowed from the relationship lender is reduced if the relationship between the lender and the borrower has been close for several years. Our findings suggest that both the decision in favor of relationship lending and the decision to switch the relationship lender are made in such a way as to balance the potential benefits and costs of a relationship lender’s access to private information.