Top

Journal of Financial Services Research

Published in:

10-05-2020

Relationship Lending and Liquidation Under Imperfect Information

Author: Eric Van Tassel

Published in: Journal of Financial Services Research | Issue 1/2022

Activate our intelligent search to find suitable subject content or patents.

search-config

AI-assisted search

Off

Abstract

Using a model of a competitive credit market, we study a firm’s choice between financing a production project using a transaction loan and a relationship loan. The project itself is characterized by uncertainty, with regards to both the amount and the timing of revenue. While the transaction lender enjoys a relatively lower cost of funds, the relationship lender’s advantage lies in being able to make a relatively more informed decision about the continuation value of the project in the event that the firm misses its initial payment obligation. In this setting, we make two important findings. First, we document how the firm’s optimal choice of loan type is dependent on both the liquidation value of the project and how accessible transaction credit is to distressed firms. Second, we investigate an opportunity for a lender to improve the quality of its lending relationship with the firm, and find that, under imperfect information, the lender may choose to decline certain welfare improving innovations.

previous article Relationship Lending and Switching Costs under Asymmetric Information about Bank Types

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

über 67.000 Bücher
über 340 Zeitschriften

aus folgenden Fachgebieten:

Bauwesen + Immobilien
Business IT + Informatik
Finance + Banking
Management + Führung
Marketing + Vertrieb
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

über 102.000 Bücher
über 537 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Finance + Banking
Management + Führung
Marketing + Vertrieb
Maschinenbau + Werkstoffe
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Available only for authorised users

For further discussion and a survey of the literature, see Bongini et al. (2015).

In our model, liquidation value can be viewed as a representation of the firm’s “inside collateral”. This value can vary for different reasons. One reason is that a firm’s assets can vary according to how specific they are to an industry, which affects liquidity and market value in the event of liquidation. Secondly, liquidation value can vary due to differences in the legal and judicial environment in which firms operate, as studied in papers such as Jappelli et al. (2005) and Egli et al. (2006).

Udell (2015) points out that in many empirical studies involving a firm’s collateral, it is often difficult to perfectly distinguish between the presence of inside collateral and outside collateral, due to limitations in the available data.

Alternatively, we could use different types of banks, namely a relationship bank and a transaction bank. However, using one type of bank who can issue different types of loans simplifies the analysis.

For a discussion on soft versus hard information, and a survey of the relevant literature, see Liberti and Petersen (2017).

These beliefs imply is that the bank has no way to signal to the firm that is has innovated, other than reducing the required loan payment in the contract offer.

Bannier C (2010) Is there a hold-up benefit in heterogeneous multiple bank financing? Journal of Institutional and Theortical Economics 166:641–661CrossRef

Behr P, Entzian A, Guttler A (2011) How do lending relationships affect access to credit and loan conditions in microlending? Journal of Banking and Finance 35:2169–2178CrossRef

Berger A (1999) The ‘big picture’ of relationship finance, Proceedings 761, Federal Reserve Bank of Chicago

Berger AN, Udell GF (1995) Relationship lending and line of credit in small firm finance. J Bus 68:351–381CrossRef

Berger AN, Udell GF (2002) Small business credit availability and relationship lending: the importance of bank organizational structure. Economic Journal 112:F37–F53CrossRef

Berger AN, Miller NH, Petersen MA, Rajan R, Stein JC (2005) Does function follow organizational form? Evidence from the lending practices of large and small banks. J Financ Econ 76:237–269CrossRef

Blume A (2003) Bertrand without fudge. Econ Lett 78:167–168CrossRef

Bolton P, Freixas X, Gambacorta L, Mistrulli PE (2016) Relationship and transaction lending in a crisis. Rev Financ Stud 29:2643–2676CrossRef

Bongini P, Di Battista ML, Nieri L (2015) Relationship lending through the cycle: What can we learn from three decades of research, working paper, SSRN

Boot AWA (2000) Relationship banking: What do we know? J Financ Intermed 9:7–25CrossRef

Boot AWA, Thakor AV (2000) Can relationship banking survive competition? Journal of Finance 55:679–713CrossRef

Brick IE, Palia D (2007) Evidence of jointness in the terms of relationship lending. J Financ Intermed 16:452–476CrossRef

Carletti E, Cerasi V, Daltung S (2007) Multiple-bank lending: Diversification and free-riding in monitoring. J Financ Intermed 3:425–451CrossRef

Cerquiero G, Degryse H, Ongena S (2011) Rules versus discretion in loan rate setting. J Financ Intermed 20:503–529

Chakraborty A, Hu CX (2006) Lending relationships in line-of-credit and nonline-of-credit loans: Evidence from collateral use in small business. J Financ Intermed 15:86–107CrossRef

Cotugno M, Monferra S, Sampagnaro G (2013) Relationship lending, hierarchical distance and credit tightening: Evidence from the financial crises. Journal of Banking and Finance 37:1372–1385CrossRef

Egli D, Ongena S, Smith DC (2006) On the sequencing of projects, reputation building, and relationship finance. Finance Res Lett 3:23–39CrossRef

Elsas R, Krahnen JP (2000) Collateral, defaul risk, and relationship lending: An empirical study on financial contracting, CEPR Discussion Paper 2540

Elsas R, Heinemann F, Tyrell M (2004) Multiple but asymmetric bank financing: the case of relationship lending, working paper, Goethe-Universitat Frankfurt

Gropp R, Guettler A (2018) Hidden gems and borrowers with dirty little secrets: Investment in soft information, borrower self-selection and competition. Journal of Banking and Finance 87:26–39CrossRef

Hainz C, Weill L, Godlewski CJ (2013) Bank competition and collateral: Theory and evidence. J Financ Serv Res 44:131–148CrossRef

Hauswald R, Marquez R (2006) Competition and strategic information acquisition in credit markets. Rev Financ Stud 19:967–1000CrossRef

Jappelli T, Pagano M, Bianco M (2005) Courts and banks: Effects of judicial enforcement on credit markets. Journal of Money, Credit and Banking 37:223–244CrossRef

Karapetyan A, Stacescu B (2018) Collateral versus informed screening during banking relationships, working paper, Norweigian Business School

Lehmann E, Neuberger D (2001) Do lending relationships matter? Evidence from bank survey data in Germany. J Econ Behav Organ 45:339–359CrossRef

Liberti JM, Petersen MA (2017) Information: hard and soft, working paper, Kellogg School of Management, Northwestern University

Longhofer SD, Santos J (2000) The importance of bank seniority for relationship lending. J Financ Intermed 9:57–89CrossRef

Manove M, Padilla AJ, Pagano M (2001) Collateral versus project screening: A model of lazy banks. Rand Journal of Economics 32:726–744CrossRef

Ono A, Uesugi I (2009) Role of collateral and personal guarantees in relationship lending: Evidence from Japan’s SME loan market. Journal of Money, Credit and Banking 41:935–960CrossRef

Park C (2000) Monitoring and structure of debt contracts. Journal of Finance 55:2157–2195CrossRef

Rajan R (1992) Insiders and outsiders: the choice between informed and arm’s length debt. Journal of Finance 47:1367–1400CrossRef

Repullo R, Suarez J (1998) Monitoring, liquidation, and security design. Rev Financ Stud 11:163–187CrossRef

Uchida H, Udell GF, Yamori N (2012) Loan officers and relationship lending to SMEs. Jorunal of Financial Intermediation 21:97–122CrossRef

Udell GF (2015) SME access to intermediated credit: What do we know, and what don’t we know?, working paper, Kelley School of Business, Indiana University

Thadden von (1995) Long-term contracts, short-term investment and monitoring. Review of Economic Studies 62:557–575CrossRef

Xu B, van Rixtel AARJM, Wang H (2016) Do banks extract informational rents through collateral?. Banco de Espana Working Paper No. 1616

Zazzaro A (2005) Should courts enforce credit contracts strictly? Economic Journal 115:165–184CrossRef

Title: Relationship Lending and Liquidation Under Imperfect Information
Author: Eric Van Tassel
Publication date: 10-05-2020
Publisher: Springer US
Published in: Journal of Financial Services Research / Issue 1/2022
Print ISSN: 0920-8550
Electronic ISSN: 1573-0735
DOI: https://doi.org/10.1007/s10693-020-00336-7

Springer Professional

Abstract

Please log in to get access to your license.

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft"

Springer Professional "Wirtschaft+Technik"

Other articles of this Issue 1/2022

The Real Effects of Universal Banking: Does Access to the Public Debt Market Matter?

Retrospective on Twenty Years of the FDIC-JFSR Bank Research Conference

Local Banking Market Frictions and Youth Crime: Evidence from Bank Failures

Relationship Lending and Switching Costs under Asymmetric Information about Bank Types