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A Multistage Model of Loans and the Role of Relationships

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  • Sugato Chakravarty
  • Tansel Yilmazer

Abstract

"We develop a multistage model of the loan granting process to understand the contradictory findings of the existing literature on bank-borrower relationships, credit availability, and loan rates. Upon estimating our model with the 1993, 1998, and 2003 versions of the Survey of Small Business Finances data set, we find that relationships matter in a borrower's decision whether to apply for a loan and in the loan approval/rejection decision by the financial institution. However, the effect of relationships on loan rates depends on the prevailing economic climate. While firms with preexisting relationships obtain credit at lower rates during periods of economic expansion, loan rates are not negatively correlated with preexisting relationships during periods of economic recession." Copyright (c) 2009 Financial Management Association International.

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Bibliographic Info

Article provided by Financial Management Association International in its journal Financial Management.

Volume (Year): 38 (2009)
Issue (Month): 4 (December)
Pages: 781-816

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Handle: RePEc:bla:finmgt:v:38:y:2009:i:4:p:781-816

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Cited by:
  1. Alexander Popov & Gregory F. Udell, 2010. "Cross-border banking and the international transmission of financial distress during the crisis of 2007-2008," Working Paper Series 1203, European Central Bank.
  2. Baele, Lieven & Farooq, Moazzam & Ongena, Steven, 2011. "Of Religion and Redemption: Evidence from Default on Islamic Loans," CEPR Discussion Papers 8504, C.E.P.R. Discussion Papers.
  3. Cole, Rebel, 2010. "Bank credit, trade credit or no credit: Evidence from the Surveys of Small Business Finances," MPRA Paper 24689, University Library of Munich, Germany, revised 15 Mar 2010.
  4. Cole, Rebel, 2008. "What do we know about the capital structure of privately held firms? Evidence from the Surveys of Small Business Finance," MPRA Paper 8086, University Library of Munich, Germany.
  5. Annie bellier & Wafa Sayeh & Stéphanie Serve, 2012. "What lies behind credit rationing? A survey of the literature," THEMA Working Papers 2012-39, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  6. Steven Ongena & Alexander Popov, 2010. "Interbank market integration, loan rates, and firm leverage," Working Paper Series 1252, European Central Bank.
  7. Giorgio Calcagnini & Fabio Farabullini & Germana Giombini, 2012. "The impact of the recent financial crisis on bank loan interest rates and guarantees," Working Papers 1202, University of Urbino Carlo Bo, Department of Economics, Society & Politics - Scientific Committee - L. Stefanini & G. Travaglini, revised 2012.
  8. Charles Calomiris & Thanavut Pornrojnangkool, 2009. "Relationship Banking and the Pricing of Financial Services," Journal of Financial Services Research, Springer, vol. 35(3), pages 189-224, June.
  9. Tansel Yilmazer & Holly Schrank, 2010. "The Use of Owner Resources in Small and Family Owned Businesses: Literature Review and Future Research Directions," Journal of Family and Economic Issues, Springer, vol. 31(4), pages 399-413, December.

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