Relationship Capital and Financing Decisions

Thomas Geelen, Erwan Morellec and Natalia Rostova
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Thomas Geelen: Copenhagen Business School - Department of Finance; Danish Finance Institute
Erwan Morellec: Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute
Natalia Rostova: Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute

No 21-46, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: Lending relationships matter for firm financing. In a model of debt dynamics, we study how lending relationships are formed and how they impact leverage and debt maturity choices. In the model, lending relationships evolve through repeated interactions between firms and debt investors. Stronger lending relationships lead firms to adopt higher leverage ratios, issue longer term debt, and raise funds from non-relationship lenders when relationship quality is sufficiently high. The maturity of debt contracts issued to non-relationship investors is higher than that of relationship investors. Negative shocks to relationship lenders drastically affect the financing choices of firms with intermediate relationship quality.

Keywords: relationship lending; capital structure; debt maturity; default (search for similar items in EconPapers)
JEL-codes: G20 G32 G33 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2021-07
New Economics Papers: this item is included in nep-ban, nep-cfn and nep-isf
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2146

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