Relationship Lending Research Articles

Relationship Lending, Banking Market Concentration and Capital Structure of Small Businesses

Relationship Lending, Banking Market Concentration and Capital Structure of Small Businesses

The Allocation of Public Guaranteed Loans to Firms During Covid-19: Credit Risk and Relationship Lending

The Allocation of Public Guaranteed Loans to Firms During Covid-19: Credit Risk and Relationship Lending

How do Changes in Financial Reporting Standards Affect Relationship Lending?

How do Changes in Financial Reporting Standards Affect Relationship Lending?

Entrepreneurial Attitudes in Firms’ Credit Access

Although enterprises make significant contributions to the GDP of countries, bank credit access is one of the biggest obstacles for them to survive. However, businesses can signal their entrepreneurial behaviors that are included in the Theory of Planned Behavior (TPB) to reduce banks’ concerns about their credit default. However, firms can have various entrepreneurial attitudes depending on their international activities that increase their innovativeness, and financial performance enabling credit access. Thus, the impact of TPB on credit access can differ depending on firms’ internationalization status and this is the main of this study to examine. For this purpose, this paper analyzes 1175 firms from various countries. The researchers apply a purposive sampling method to create a research sample and direct an internet-mediated questionnaire to the selected respondents. Binary Logistic Regression analyses have been performed by the researchers to investigate the impact of TPB on credit access. The results show that the components of TPB, personal attitude, personal behavioral control, and subjective norms have different impacts on the credit access of international and domestic companies. Personal attitude and subjective norms negatively affect bank credit access of international and domestic firms, respectively while they do not determine credit access of domestic and international firms, respectively. Moreover, personal behavioral control positively affects credit access of domestic and international companies. The reason for these results might be related to firm-level and country-level characteristics. Relationship lending and the educational and financial support of academicians and policymakers can provide solutions for credit access problems of firms.

Distance and Financial Connection: Dynamics in Private Firms’ Bank Loan Availability

ABSTRACT This study investigates the impact of borrower-lender distance on credit availability for private firms. Utilizing an extensive loan record history, we categorize loans into initial and subsequent borrowings. Our analysis reveals a consistent trend: loan size diminishes with increasing distance, even after accounting for Fintech effects. A noteworthy finding is the divergent role of financial connections. During initial borrowings, they mitigate the adverse effects of distance, while in subsequent borrowings, they become a positive signal to lenders, particularly post-soft information insights. These insights highlight intricate dynamics in credit availability, emphasizing the evolving roles of technology and financial connections in shaping lending relationships for private firms.

Global contagion risk and IMF credit cycles: Emergency exits and revolving doors

AbstractWhy does the International Monetary Fund (IMF) exit its lending relationships before member states have resolved their financial crises? It is particularly surprising given that the IMF often resumes its lending shortly after its withdrawal. We argue that IMF withdrawals are conditioned by global contagion risk. The tension between the IMF's mandate of global financial stability and its limited financial resources compels the IMF's early exit from its lending relationships. During periods of high global contagion, the IMF prioritizes its mandate by continuing its lending despite noncompliance. However, when the IMF perceives minimal contagion risk, it focuses on moral hazard, and willingly cuts its lending ties to preserve its reputation and resources for future crises. Employing a comparative analysis of IMF decision‐making in two of its largest borrowers, Argentina and Greece, we find supportive evidence for our claims.

Gone with the big data: Institutional lender demand for private information

I explore whether big-data sources can crowd out the value of private information acquired through lending relationships. Institutional lenders have been shown to exploit their access to borrowers' private information by trading on it in financial markets. As a shock to this advantage, I use the release of the satellite data of car counts in store parking lots of U.S. retailers. This data provides accurate and near–real-time signals of firm performance, which can undermine the value of borrowers' private information obtained through syndicate participation. I find that once the satellite data becomes commercially available, institutional lenders are less likely to participate in syndicated loans. The effect is more pronounced when borrowers are opaque or disseminate private information to their lenders earlier and when the data predicts borrower performance more accurately. I also show that institutional lenders’ reduced demand for private information leads to less favorable loan terms for borrowers.

Debt Flexibility

This paper documents new facts on the modification of bank loans using FR Y-14Q regulatory data on C and I loans. We find that loan-level modifications of key contractual terms, such as interest and maturity, occur at least once for 41% of loans. Cross sectional differences in modifications are substantial and amplified by borrower distress. Relative to single-lender loans, syndicated loans are 1.5 times more likely to be modified and interest rate changes are twice as likely. Our findings call into question whether 1) creditor dispersion makes loan modifications more challenging and 2) relationship lending between banks and small borrowers creates more scope for flexibility when borrower-level conditions change.

Does relationship lending matter in an emerging market?

ABSTRACT Based on a unique database (data on 2529 bank-firm relationships of 403 firms from 2012 to 2018) provided by the Central Bank of Tunisia, this article analyses the impact of the intensity and duration of bank-firm relationship on loan quality. By estimating a panel ordered probit model, the results show that the intensity of the lending relationship has a positive (negative) impact on high (medium or low) quality loans. In addition, the duration of the bank-firm relationship increases the probability of low-quality loans. We also find that the impact of relationship lending on loan quality differs according to the level of profitability of the firm. Low and non-performing firms tend to have longer and closer bank relationship, whereas it is the opposite for performing firms. Our results suggest that in an emerging market concentrated around a few banks, longer and closer banking relationships are mainly in favour of low and non-performing firms, reflecting adverse selection and strong moral hazard.

COMPARATIVE ANALYSIS OF STOCK RETURNS OF ZOMBIE FIRMS AND BIST 30 FIRMS WITH STATISTICAL METHODS

The concept of ‘zombie’ companies was first proposed by Kane in 1987. The three common features of these companies are listed as follows; high debt level, low profit rate and productive companies reduce their productivity. Zombie firms are defined as companies with persistently low profitability, high leverage, or negative equity capital. However, instead of defining a business as a zombie with single company data, it would be more accurate to look at bank and company level data that also show the lending relationships between credit institutions and corporate debtors. (Álvarez et al., 2023). 
 In our study, companies having negative equity capital for at least three consecutive years were considered zombies, whereas these companies were selected from the ISO 1000 industrial enterprises. Particular attention was paid to ensure these companies continued to be traded on BIST. Additionally, BIST 30 companies were analyzed and stock returns and statistical evaluations were also analyzed.

The Impact of Lending Relationships on the Lead Arrangers’ Retained Share

The lead arrangers of syndicated loans often have lending relationships with the borrowers, while other lenders participating in the syndicate largely engage in an arm’s length transaction. Relatively little is known about how these relationships affect the shares of syndicated loans that the lead arrangers retain in their portfolio. Using a random sample of 10,328 syndicated loans made to 7316 nonfinancial U.S. firms over the period 1987 to 2013, this paper investigates the impact of lending relationships on the shares of loans retained. The results show that lending relationships are associated with a significant reduction in retained shares. These results are robust to alternative estimation techniques, such as propensity score matching and binary endogenous treatment models, which are employed to address endogeneity concerns. Furthermore, the results provide additional evidence that the existence and strength of lending relationships lead to decreased retained shares, particularly for non-top-tier lead arrangers. Moreover, the findings also demonstrate that when lead arrangers have lending relationships with borrowers, they retain significantly smaller shares whether the loans are made to informationally opaque, small, or speculative-grade-rating firms. Overall, the findings of this paper have important implications for lenders seeking to reduce their risk exposure in syndicated loans.

Changes in SMEs financing: risks and opportunities for agro-food companies

The financial and real crisis started in 2007-2008 has deeply transformed the way the Italian financial and capital market act. Italian SMEs need to be aware of the transformation not to be pushed out of the market itself and to take profit of the new relevant opportunities coming out thanks to the emerging new products and new intermediaries.The paper focuses the disappear of banks relationship lending and provides evidence about how to approach the market in the emerging "competing for capital" prevailing rule.It also stresses the relevance of ESG topics as emerging risk factor companies must look at when asking for new finance because of the Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability related disclosures in the financial services (SFDR).

Using REIT Follow-on Equity Offerings to Pay down Credit Line Balances: Bank Certification or Monitored Financial Flexibility?

Using hand collected data from offering prospectuses and other corporate filings, we examine the market response to real estate investment trust (REIT) follow-on stock offerings’ stated uses of proceeds. We also track REIT banking relationships over time. Consistent with the idea of bank certification, we show that markets react relatively favorably to REIT equity offers where issuers have lending relationships with affiliates of the underwriters. However, we also find that reactions are most favorable where REIT issuers intend to repay their bank’s line of credit, regardless of the bank’s affiliation with the underwriters. This pattern is particularly strong among smaller firms with lower institutional ownership. We posit that credit line repayments preserve benefits of bank monitoring while enhancing financial flexibility. Further examination reveals that this monitored financial flexibility is the dominant effect.

Close competitors? Bilateral bank competition and spatial variation in firms’ access to credit

Abstract We interviewed 379 bank CEOs in 20 emerging markets to identify their banks’ main competitors. We show that banks are more likely to identify another bank as a main competitor in small-business lending when both banks are foreign owned or relationship oriented; when there exists a large spatial overlap in their branch networks and when the potential competitor has fewer hierarchical layers. We then construct a novel bilateral competition measure at the locality level and assess how well it explains geographic variation in firms’ credit constraints. We show that intense bilateral bank competition tightens local credit constraints, especially for small firms, as competition may impede the formation of lending relationships.

Big broad banks: how does cross-selling affect lending?

Abstract This article investigates how cross-selling affects relationship lending using internal data from a large bank and the Swedish credit registry. I show that within a bank–firm relationship, profit earned from non-loan products cross-subsidizes loans and increases (1) credit supply and (2) the likelihood of the bank’s pausing or waiving interest payments for delinquent loans (lenience in delinquency). For identification, I exploit the Basel II-induced exogenous variation in products’ profitability while holding constant the firm’s creditworthiness and relationship informativeness. I find that the average affected firm experienced a decrease of 6 percent ($400,000) in credit supply and 30 percent (9.8 pp) in lenience in delinquency. The results highlight the importance of cross-subsidization as a mechanism through which cross-selling affects bank–firm relationships and inform optimal regulatory design for lenders who multi-produce.

Firm-level political risk and credit markets

We take advantage of a new composite measure of political risk (Hassan et al., 2019) to study the effects of firm-level political risk on private debt markets. First, we use panel data tests and exploit the redrawing of US congressional districts to uncover plausibly exogenous variation in firm-level political risk. We show that borrowers’ political risk is linked to interest rates set by lenders. Second, we test for the transmission of political risk from lenders to borrowers. We predict and find that lender-level political risk propagates to borrowers through lending relationships. Our analysis allows for endogenous matching between lenders and borrowers and indicates the presence of network effects in diffusing political risk throughout the economy. Finally, we introduce new text-based methods to analyze the distinct sources of political risk to lenders and borrowers and provide textual evidence of the transmission of political risk from lenders to borrowers.

Bank loans, trade credit, and liquidity shortages of small businesses during the global financial crisis

We investigate how small businesses responded to liquidity shortages during the financial crisis, focusing on heterogeneity between young and mature firms. With the sudden onset of the financial crisis, many small businesses faced declines in cash flows and liquidity shortages. Using over 4 million firm-year observations from Japan, we show that mature firms used bank loans more than young firms when facing liquidity shortages. This is consistent with previous studies indicating that banks offer liquidity provisions to firms with which they have close lending relationships. By contrast, trade payables did not largely increase for mature or young firms during the crisis. This suggests that mature firms relied on banks, not suppliers, for liquidity provision during the crisis. Furthermore, mature firms that experienced declines in cash flow during and after the crisis were likely to default and exit. This implies that credit allocation to mature firms is inefficient.

THE IMPORTANCE OF SIGNALLING ENTREPRENEURIAL ORIENTATION AND RELATIONSHIP LENDING FOR SMES’ BANK CREDIT ACCESS

Although SMEs matter for the development of economies, they need financing that is the main impediment to their survival. To overcome this barrier, SMEs might reduce information asymmetries between them and banks by signaling their entrepreneurial activities that are based on Entrepreneurial Orientation (EO) and by having frequent contact with banks in a lending relationship. In this regard, this paper purposes to find out the impacts of signaling EO and relationship lending on bank credit access of SMEs. To fulfill this aim, the researcher has applied stratified random and purposive sampling methods to create the research sample from SMEs that operate in various geographical regions of Turkey. The researcher also employs a self-administered internet-mediated questionnaire to collect data from 479 SMEs. Moreover, this paper runs Binary Logistic Regression Test to analyze the impacts of signaling EO and lending relationship on bank credit access. According to the results, trademark ownership, R&D subsidies received by SMEs and closeness of communication between SMEs and banks positively affect bank credit access of SMEs. On the other hand, patent ownership, R&D investments and alliances of SMEs with prominent firms do not influence their credit access.

The importance of individual-pair lending relationships

AbstractWe examine the significance and uniqueness of individual-pair relationships cultivated through repeated loan interactions. Using a hand-collected dataset compiled of borrowing manager and loan officer information, we find that individual-pair relationship loans are associated with a cost-of-debt reduction of between seven to 13 basis points. We also document that the relationship has an economic impact even when other affiliations, for example, institutional pairs, social ties, cultural proximity, and gender, are considered. Individual-pair relationships matter because they furnish lenders with useful soft information, especially when the firm has a poor hard information environment or when the bank and loan officer rely less on hard information. In addition, we find that individual-pair relationship loans have fewer rating downgrades, suggesting that accumulated soft information leads to better loan quality. Collectively, our results highlight the unique value of sustained professional engagement between two individuals in the lending process.

Enduring lending relationships and european firms default

This paper investigates the link between close banking relationships and European manufacturing firms’ defaults. Based on binary outcomes (i.e., Logit, Probit, Complementary log-log) and discrete-time models, the empirical analysis reveals that enduring lending relationships present benefits in reducing firms’ temporary and permanent defaults. This evidence suggests that, in a framework of limited credit access that may compromise firms’ survival, relationship lending might represent an effective tool for overcoming asymmetric information problems, helping firms relax credit constraints, encouraging greater discipline in their managers, and preventing failure.