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The choice between arm's-length and relationship debt: evidence from e-loans

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  • Sumit Agarwal
  • Robert Hauswald

Abstract

Using a unique sample of comparable online and in-person loan transactions, we study the determinants of arm's-length and inside lending focusing on the differential information content across debt types. We find that soft private information primarily underlies relationship lending whereas hard public information drives arm's-length debt. The bank's relative reliance on public or private information in lending decisions then determines trade-offs between the availability and pricing of credit across loan types. Consistent with economic theory, relationship debt leads to informational capture and higher interest rates but is more readily available whereas the opposite holds true for transactional debt. In their choice of loan type, lender switching, and default behavior firms, however, anticipate the inside bank's strategic use of information and act accordingly.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-08-10.

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Date of creation: 2008
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Handle: RePEc:fip:fedhwp:wp-08-10

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Keywords: Loans ; Debt management;

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References

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Cited by:
  1. Ono, Arito & Hasumi, Ryo & Hirata, Hideaki, 2014. "Differentiated use of small business credit scoring by relationship lenders and transactional lenders: Evidence from firm–bank matched data in Japan," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 371-380.
  2. Moro, Andrea & Fink, Matthias, 2013. "Loan managers’ trust and credit access for SMEs," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 927-936.

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