Does repeated borrowing from the same lender affect loan contract terms? We find that such borrowing translates into a 10 to 17 bps lowering of loan spreads. These results hold using multiple approaches (Propensity Score Matching, Instrumental Variables, and Treatment Effects Model) that control for the endogeneity of relationships. We find that relationships are especially valuable when borrower transparency is low and the moral hazard among lending syndicate members is high. We also provide a demarcation line between relationship and transactional lending. We find that spreads charged for relationship loans and non-relationship loans become indistinguishable if the borrower is in the top 30% when ranked by asset size. Similar dissipation of relationship benefits occurs if the borrower has public rated debt or is part of the S&P 500 index. We find that past relationships reduce collateral requirements. Relationships are also associated with shorter debt maturity especially for the lowest quality borrowers. Our results are robust to an estimation methodology which allows loan spread, collateral requirements, and loan maturity to be determined jointly using an instrumental variables approach. We also find relationship borrowers obtain larger loans (scaled by the borrower's asset size) compared to non-relationship borrowers. Our results imply that, even for firms that have multiple sources of outside financing, borrowing from a prior lender obtains better loan terms.

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While a number of empirical studies have documented benefits of lending relationships to borrowers (lower loan rates, better credit availability, etc.), not much is known about benefits of such relationships for lenders. For a relationship lender, its comparative advantage in information gathering/processing yields two potential benefits. First, a relationship lender would have a higher probability of selling future information-sensitive products (e.g. loans, security underwriting, etc.) to its borrowers compared to a non-relationship lender. We refer to this as higher volume benefit of relationship lending. Second, if borrower-specific information is only available to relationship lender, it can use this information monopoly to charge higher rates on future loans. We refer to this as increased pricing benefit of relationship lending. Our results show that, on average, a lender with a past relationship with a borrower has a 42% probability of providing it with future loans, while a lender lacking a past relationship with a borrower has only a 3% probability of providing it with a future loan. Consistent with theory, we find that borrowers with greater information asymmetries (e.g. small borrowers, or non-rated borrowers) are significantly more likely to use their relationship banks for future loans. Although the association between past lending relationship and probability of being chosen to provide debt and equity underwriting services in the future is statistically significant, the economic impact is much smaller compared to loan markets. However, our findings do not provide strong support for an increased pricing benefit for relationship lenders. On average, the rate of interest for similar borrowers is 6-10 basis points lower if the loan is provided by a relationship lender. Underwriting fee for initial public offerings (IPO) with relationship lender(s) as lead underwriter(s) is 26 basis points lower. This suggests that lenders are prepared to share some of the benefits of relationship lending with borrowers. * Bharath is with University of Michigan, Dahiya is with Georgetown University, Saunders is with New York University, and Srinivasan is with University of Georgia. Dahiya acknowledges the support of the Lee Higdon, Jr. So What Do I Get? The Bank's View of Lending RelationshipsAbstract While a number of empirical studies have documented benefits of lending relationships to borrowers (lower loan rates, better credit availability, etc.), not much is known about benefits of such relationships for lenders. For a relationship lender, its comparative advantage in information gathering/processing yields two potential benefits. First, a relationship lender would have a higher probability of selling future information-sensitive products (e.g. loans, security underwriting, etc.) to its borrowers compared to a non-relationship lender.We refer to this as higher volume benefit of relationship lending. Second, if borrowerspecific information is only available to relationship lender, it can use this informatio...

Debtor-in-possession (DIP) financing is unique secured financing available to firms filing for Chapter 11. Opponents of DIP financing argue that it leads to overinvestment. Alternatively, DIP financing can allow funding for positive net present value projects that increase the likelihood of reorganization and reduce time in bankruptcy. Using a large sample of bankruptcy filings, we find little evidence of systematic overinvestment. DIP financed firms are more likely to emerge from Chapter 11 than non-DIP financed firms. DIP financed firms have a shorter reorganization period; they are quicker to emerge and also $ We would like to thank Arnoud Boot, Stuart Gilson, Edith Hotchkiss, Jan Krahnen, Eric Rosengren, Per Stromberg, Karin Thorburn, and, particularly, Michael Bradley as well as two anonymous referees for valuable insights and suggestions. The paper has benefited from the comments and suggestions of participants in seminars at

One of the most important risks faced by a bank is that of loan default by its borrowers. Existing literature has documented the negative announcement-period returns for lending banks when a big sovereign borrower announces a moratorium on its bank loans. In contrast, little research has been undertaken that analyzes bank shareholder wealth effects when a major corporate borrower declares default and/or bankruptcy. This paper uses a unique data set of bank loans to examine the wealth effects on lead lending banks when their borrowers' suffer financial distress. For the 10-year period from 1987 to 1996, we examine a sample of 71 firms that defaulted on their public debt and a sample of 101 firms that filed for bankruptcy. We find a significant negative wealth effect for the shareholders of the lead lending banks on the announcement of bankruptcy and default by the borrowers of their bank. We also find that the banks with relatively higher exposure to the distressed firms have larger negative announcement-period returns, although individual loan details are not public knowledge. Thus, the market appears to discriminate among lenders in a way not inconsistent with a correct inference of individual borrower exposures. We also examine the impact of various loan and bank characteristics on the magnitude of announcement returns. We find that the existence of a past lending relationship with the distressed firm results in larger wealth declines for the bank shareholders. Finally, we find that financial distress also has a significantly negative effect on borrower's returns.3