Personal Lending Relationships

Abstract

I identify the effects of personal relationships on loan contracting using executive deaths and retirements at other firms as a source of exogenous variation in executive turnover. After plausibly exogenous turnover, borrowers choose lenders with which their new executives have personal relationships 4.1 times as frequently, and loans from these lenders have 20 basis points lower spreads and 12.5% larger amounts. Personal relationships benefit firms across loan terms, especially during macroeconomic downturns. Increased financial flexibility from personal relationships insulated firms from financial shocks during the recent financial crisis: they exhibited less constrained investment and were less likely to layoff employees.

Bank Capital and Lending Relationships

“…If data for smaller, private firms were available, I would expect them to sort more strongly to well-capitalized banks because these firms have higher costs of relationship termination and require stronger monitoring than the bank-dependent firms in my sample. However, this prediction depends on these firms having access to a local branch of a well-capitalized bank and other factors, such as management's personal banking relationships (Karolyi (2017)), not outweighing stability and monitoring incentives in the choice among banks. 55 This computation is based on Table X of Chodorow-Reich (2014).…”

“…Basel II modified the risk-weighting scheme to differentiate corporate exposures by credit risk, but its implementation in the United States was delayed until after the financial crisis. In the Internet Appendix, I show that bank-dependent firms match with well-capitalized banks almost every year from 1987 to 2012. relationships of the firm (Bharath et al (2007)) and its executives (Engelberg, Gao, and Parsons (2012), Karolyi (2017)). Jing (2014) further shows that firms of low credit quality borrow from banks that specialize in monitoring, and Ongena and Smith (2001) and Gopalan, Udell, and Yerramilli (2011) show that small, high-growth firms are more likely to switch banks to obtain additional credit.…”

Director Networks and Credit Ratings

“…Previous literature focuses on only the direct connections between the agents in debt contracts, or the direct connection of the agents of entity A to the agents of entity B (the rating firm or financier). Karolyi (2013) argues that business relationships form between the agents within two entities, not between the entities themselves. Consistent with this view, we show that boards with larger and more influential overall networks, over and above, direct ties to rating agencies or financial firms, improve credit ratings.…”

Fear, Anger, and Credit. On Bank Robberies and Loan Conditions

“…If anything the sign of the coefficients suggests that the effect of a bank robbery between an individual firm manager and loan officer. Notice that this may not be the case for large firms and/or banks where personal ties may need to be distinguished from institutional ones (e.g., Herpfer 2018;Karolyi 2018;Lehmann and Neuberger 2001).…”