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The importance of individual-pair lending relationships

Author

Listed:
  • Omri Even-Tov

    (Haas School of Business, University of California)

  • Xinlei Li

    (Graduate School of Management, University of California, Davis)

  • Hui Wang

    (Renmin University of China)

  • Christopher Williams

    (Stephen M. Ross School of Business – University of Michigan)

Abstract

We examine the significance and uniqueness of individual-pair relationships cultivated through repeated loan interactions. Using a hand-collected dataset compiled of borrowing manager and loan officer information, we find that individual-pair relationship loans are associated with a cost-of-debt reduction of between seven to 13 basis points. We also document that the relationship has an economic impact even when other affiliations, for example, institutional pairs, social ties, cultural proximity, and gender, are considered. Individual-pair relationships matter because they furnish lenders with useful soft information, especially when the firm has a poor hard information environment or when the bank and loan officer rely less on hard information. In addition, we find that individual-pair relationship loans have fewer rating downgrades, suggesting that accumulated soft information leads to better loan quality. Collectively, our results highlight the unique value of sustained professional engagement between two individuals in the lending process.

Suggested Citation

  • Omri Even-Tov & Xinlei Li & Hui Wang & Christopher Williams, 2024. "The importance of individual-pair lending relationships," Review of Accounting Studies, Springer, vol. 29(4), pages 3907-3945, December.
    • Handle: RePEc:spr:reaccs:v:29:y:2024:i:4:d:10.1007_s11142-023-09782-9
    DOI: 10.1007/s11142-023-09782-9
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    More about this item

    Keywords

    Individual-pair lending relationships; Asymmetric information; Soft information; Professional connections; Bank lending; Debt contracting;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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