Abstract
We examine the contractual implications of a lender’s trust in corporate loans. We measure how trusting a lender is using the average trust attitude in the CEO’s ancestral country of origin. We find that banks with trusting CEOs charge lower interest rates in US syndicated loans. This effect is identified within existing lender-borrower relationships and similar loan types. Further analyses indicate that trust reduces the cost of credit by boosting the perceived credibility of borrower information and by mitigating contracting problems. We corroborate our findings by conducting a survey of bankers with experience in loan syndication.
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