Relationship Lending and Loan Performance

Abstract

This paper studies whether relationship banks help firms in financial distress. Combining a new and direct measure of relationship lending with unique credit registry data, I examine the effect of relationship lending on ex-post loan performance. My findings demonstrate that the same firm is more likely to become temporary delinquent on a relationship-based relative to a transaction-based loan. Consistent with theory, relationship banks tolerate temporary bad results, yet extract rents in the long run. When firms are in distress, relationship banks adjust contract terms and allow drawdowns on credit lines and overdrafts but do not rollover loans more often. Moreover, relationship banks are more likely to continue to lend to firms after past non-performance. Overall, the paper uncovers a new channel of how relationship lending serves as a liquidity insurance for firms in distress.