Abstract
The spatial range between banks and their borrowers has commonly been considered as ambiguous in literature on borrower-lenderrelationships; On the one hand, a higher spatial separation increases informational costs, resulting in ceteris paribus higher interest rates charged by the lending bank. On the other hand, borrowers located closely to their lending banks are exposed to the local market power of the latter and therefore charged higher loan rates. With maintaining a single bank relationship, firms furthermore might occur liquidity risks. In this paper, the spatial distance between German firms and their banks is considered as impact on firms’ lending rate. Employing Heckman’s two-stage approach, there is strong evidence that distance has a positive impact on firms’ lending rates in relationship lending.
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