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Lines of Credit and Relationship Lending in Small Firm Finance

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  • Allen N. Berger

    (The Jerome Levy Economics Institute)

  • Gregory F. Udell

    (The Jerome Levy Economics Institute)

Abstract

This paper examines the role of relationship lending using a data set on small firm finance. We specifically examine price and nonprice terms of commercial bank lines of credit (L/C) extended to small firms. Our focus on bank L/Cs allows us to examine a type of loan contract where the bank-borrower relationship is likely to be an important mechanism for solving asymmetric information problems associated with financing small enterprises. We find that borrowers with longer banking relationships tend to pay lower interest rates and are less likely to pledge collateral. These results are consistent with theoretical arguments that relationship lending generates valuable information about borrower quality.

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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 9906006.

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Length: 39 pages
Date of creation: 15 Jun 1999
Date of revision:
Handle: RePEc:wpa:wuwpma:9906006

Note: Type of Document - Acrobat PDF; prepared on IBM PC; to print on PostScript; pages: 39; figures: included
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Web page: http://128.118.178.162

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References

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Citations

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Cited by:
  1. Gary Gorton & George Pennacchi, 1990. "Banks and Loan Sales: Marketing Non-Marketable Assets," NBER Working Papers 3551, National Bureau of Economic Research, Inc.
  2. Anil K. Kashyap & Raghuram Rajan & Jeremy C. Stein, 1999. "Banks as Liquidity Providers: An Explanation for the Co-Existence of Lending and Deposit-Taking," NBER Working Papers 6962, National Bureau of Economic Research, Inc.
  3. Anjan V. Thakor, 2004. "Capital Requirements, Monetary Policy, and Aggregate Bank," Finance 0411027, EconWPA.
  4. Joe Peek & Eric S. Rosengren, 1995. "Small business credit availability: how important is size of lender?," Working Papers 95-5, Federal Reserve Bank of Boston.
  5. Takeo Hoshi & Anil Kashyap, 2000. "The Japanese Banking Crisis: Where Did It Come From and How Will It End?," NBER Chapters, in: NBER Macroeconomics Annual 1999, Volume 14, pages 129-212 National Bureau of Economic Research, Inc.
  6. James R. Barth & Glenn Yago & Betsy Zeidman, 2006. "Stumbling blocks to entrepreneurship in low-and-moderate income communities," Proceedings: Community Affairs Dept. Conferences, Federal Reserve Bank of Kansas City, issue Jul, pages 91-155.
  7. Anjali Kumar & Manuela Francisco, 2005. "Enterprise Size, Financing Patterns, and Credit Constraints in Brazil : Analysis of Data from the Investment Climate Assessment Survey," World Bank Publications, The World Bank, number 7330, July.

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