Relationship Lending and Corporate Investment Decisions

This chapter delves into the profound impact of relationship lending on corporate investment decisions, highlighting its role in mitigating informational frictions and providing stable credit access. It explores how relationship lending fosters innovation by supporting riskier investments, facilitates international expansion by helping firms overcome export barriers, and stabilizes employment during downturns. The chapter also examines the influence of relationship lending on firm entry dynamics, favoring spinoffs and larger entrants. Additionally, it discusses the potential risks, such as rent extraction and hold-up problems, that accompany the benefits of relationship lending. The empirical evidence presented underscores the nuanced view that relationship lending is a powerful tool for overcoming financial frictions, but its effectiveness depends on the balance between flexibility and lock-in, and the institutional environment.