Matching Banks and Firms in the Loan Market: Evidence from Similarity in Risk Attitudes

Abstract

This study investigates the effect of similarity in risk attitudes between lenders and borrowers on loan contracting. We find that when banks and lenders have similar risk attitudes they are more likely to sign loan contracts. Moreover, such contracts are associated with lower spreads, longer maturity, larger size, and less collateral, suggesting that borrowers can obtain favorable loans when they obtain financing from banks with similar risk attitudes. Meanwhile, similar risk attitudes can also benefit lenders by generating more repeat loans and fewer loan covenant violations in the future. The evidence suggests that closeness of risk attitude can benefit both lenders and borrowers in loan contracting.