Authors: Jan Keil (University of the West Indies)
Title: The Lending Relationships of Relationship Lenders
Abstract: I investigate how “relationship lenders” manage lending relationships at the borrower and loan levels, and how they do this differently than transaction lenders. Exploring consequences of bank actions when covenant violations shift control rights to creditors, I find that relationships prevent substantial declines in investment and firm survival probabilities. I observe directly that relationship banks formally renegotiate loans more frequently and favorably during creditor control, in general, and when borrowers are distressed. After lenders grant a loan for the first time, some become relationship lenders as the contractual relationship matures. Surprisingly, there is little evidence for downsides of relationships.