The Choice Between Arm's-Length and Relationship Debt: Evidence from eLoans

Abstract

Using a unique sample of comparable online and in-person loan transactions, we study the determinants of arm's-length and inside lending focusing on the differential information content across debt types. We find that soft private information primarily underlies relationship lending whereas hard public information drives arm's-length debt. The bank's relative reliance on public or private information in lending decisions then determines trade-offs between availability and pricing of credit across loan types. Consistent with economic theory, relationship debt leads to informational capture and higher interest rates but is more readily available whereas the opposite holds for relationship credit. In their choice of loan type, lender switching, and default behavior firms, however, anticipate the inside bank's strategic use of information and act accordingly.

Distance and Private Information in Lending

“…This finding is consistent with the notion that soft information can limit competition by counteracting either a transportation cost or any informational advantage, which a competitor might hold in turn, with an adverse-selection threat. 17 Agarwal and Hauswald (2007) provide evidence that firms disclose confidential information, which facilitates the acquisition of soft intelligence, when seeking to establish long-term lending relationships.…”

Securitization and Lending Competition

“…12 9 That is, a project's success probability is S R regardless of the outcomes of other projects. 10 One can include a constant term in equation (1) by assuming that one of the factors is a constant. 11 Factor dependence within and across regions is permitted, as detailed below in section 2.1.3.…”

“…16 Indeed, Agarwal and Hauswald [1] …nd that the chance that a bank will approve an online loan is increasing in both the applicant's public credit quality and the bank's internal assessment, but the latter's e¤ect is very small. Limit Irrelevance permits the depiction of our results using simple twodimensional diagrams.…”

“…1 The proportion of mortgages held in market-based instruments rose steadily from 20% in 1980 to 68% in 2008. 2 Earlier evidence indicates that securitization has been growing at least since 1975 (Ja¤ee and Rosen [21, Table 2…”

How Can Banks Effectively Stabilize Their Retail Customers’ Saving Behavior? The Impact of Contractual Rewards on Saving Persistence and Cash Flow Volatility

“…In addition, most studies address corporate customers Ongena et al, 2011). In other words, the topic mainly concerns relationship lending to firms (Boot, 2000;Ongena and Smith, 2000;Agarwal et al, 2006;Agarwal and Hauswald, 2008;Degryse et al, 2009;Agarwal and Hauswald, 2010). Studies on customer development find that retail customers evolved during the last few decades and are now better informed than they were in the past (e.g., Turner, 2009).…”