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Information acquisition in SME's relationship lending and the cost of loans

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  • Comeig, Irene
  • Fernández-Blanco, Matilde O.
  • Ramírez, Federico

Abstract

This study analyzes the effect of the reputation SMEs get in a relationship lending on the cost of next loans. A unique dataset of 734 Spanish SMEs' relationship lending provides information on a loan-by-loan basis about the ex post previous loan performance, which measures reputation. No prior empirical research differentiates the cost of loans following a defaulted loan from the costs of those following a successfully repaid loan. Results show that lenders obtain information about borrowers' risk-level during relationship lending and use this information. Loans granted after a successful one pledge significantly lower collateral and interest rate than loans granted after a defaulted one. However, the pledged collateral is stronger in the second loan not only following a defaulted loan but also following a successfully repaid one. This result is consistent with the credit screening mechanism, in which good borrowers differentiate themselves from bad ones by pledging high collateral to get lower interest rates.

Suggested Citation

  • Comeig, Irene & Fernández-Blanco, Matilde O. & Ramírez, Federico, 2015. "Information acquisition in SME's relationship lending and the cost of loans," Journal of Business Research, Elsevier, vol. 68(7), pages 1650-1652.
    • Handle: RePEc:eee:jbrese:v:68:y:2015:i:7:p:1650-1652
    DOI: 10.1016/j.jbusres.2015.02.012
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    3. Rahman Ashiqur & Rahman M. Twyeafur & Belas Jaroslav, 2017. "Determinants of SME Finance: Evidence from Three Central European Countries," Review of Economic Perspectives, Sciendo, vol. 17(3), pages 263-285, September.
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    6. Adomako, Samuel & Ahsan, Mujtaba, 2022. "Entrepreneurial passion and SMEs’ performance: Moderating effects of financial resource availability and resource flexibility," Journal of Business Research, Elsevier, vol. 144(C), pages 122-135.

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