Connected Lending in Bank Lines of Credit

Shu Feng (), Chang Liu () and Xiaoling Pu ()
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Shu Feng: Clark University
Chang Liu: University of Central Missouri
Xiaoling Pu: Kent State University

Journal of Financial Services Research, 2022, vol. 61, issue 2, No 2, 187-216

Abstract: Abstract We find that firms usually obtain larger credit lines if their executives have common past employers or past board memberships with lenders. The effect not only exists in the initial amount of credit lines but also the amendment amount during renegotiation. The effect is stronger during the financial crisis and persists after the financial crisis. Having a relationship with banks increases the lines of credit for borrowers with financial constraints or high idiosyncratic risks. More importantly, connected firms obtain larger increases in short-term funding during renegotiation when they have negative credit quality or earnings news. Overall, our findings suggest that asymmetric information is reduced through ties between borrowers and lenders, which significantly improves the short-term funding capacity in the dynamic contract of credit lines.

Keywords: Connected lending; Bank lines of credit; Renegotiation (search for similar items in EconPapers)
JEL-codes: G21 G32 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s10693-021-00354-z

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