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Relationship lending: Is it Incentives or hidden information?

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  • Vinicius Carrasco

    ()
    (Department of Economics PUC-Rio.)

  • João Manoel Pinho de Mello

    ()
    (Department of Economics PUC-Rio)

Abstract

Relationships are a valuable technology to produce loans. (Berger and Udell [1995], Petersen and Rajan [1994], Aoki and Dinç [2002]). While there are convincing theories in which relationships solve hidden action or hidden information problems, there is very little empirical corroboration of either theory. In this paper, we assess the empirically validity of these theories in the small firm credit market. While results suggest that relationships are more valuable for firms with worse incentive misaligment problems, more informationally opaque firms do not seem to extract more value from relationships. Contrary to what most empirical research on the value of relationships has assumed (but not tested), this indicates that relationships are, at very least, as important for aligning incentives as they are for solving hidden information problems.

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Bibliographic Info

Paper provided by Department of Economics PUC-Rio (Brazil) in its series Textos para discussão with number 519.

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Length: 20p.
Date of creation: May 2006
Date of revision:
Handle: RePEc:rio:texdis:519

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  1. Allen N. Berger & Gregory F. Udell, 2002. "Small Business Credit Availability and Relationship Lending: The Importance of Bank Organisational Structure," Economic Journal, Royal Economic Society, vol. 112(477), pages F32-F53, February.
  2. Bolton, Patrick & Scharfstein, David S, 1990. "A Theory of Predation Based on Agency Problems in Financial Contracting," American Economic Review, American Economic Association, vol. 80(1), pages 93-106, March.
  3. Allen N. Berger & Nathan H. Miller & Mitchell A. Petersen & Raghuran G. Rajan & Jeremy C. Stein, 2002. "Does function follow organizational form? evidence from the lending practices of large and small banks," Proceedings 815, Federal Reserve Bank of Chicago.
  4. Rajan, Raghuram G, 1992. " Insiders and Outsiders: The Choice between Informed and Arm's-Length Debt," Journal of Finance, American Finance Association, vol. 47(4), pages 1367-400, September.
  5. Petersen, Mitchell A & Rajan, Raghuram G, 1994. " The Benefits of Lending Relationships: Evidence from Small Business Data," Journal of Finance, American Finance Association, vol. 49(1), pages 3-37, March.
  6. Boot, Arnoud W A & Thakor, Anjan V, 1994. "Moral Hazard and Secured Lending in an Infinitely Repeated Credit Market Game," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(4), pages 899-920, November.
  7. Berger, Allen N & Udell, Gregory F, 1995. "Relationship Lending and Lines of Credit in Small Firm Finance," The Journal of Business, University of Chicago Press, vol. 68(3), pages 351-81, July.
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