Firm Risk-Taking and Relationship Lending
Student thesis: Master's Thesis
Related Research Unit(s)
This paper empirically shows the relationship lending under risk-taking circumstances. Using a large loan sample from 1987 to 2018, and several firms’ operating risk proxies, I find that in both cross-sectional and within-firm tests, high risk-taking firms have significantly high retention rates of relationship lenders. In other words, these firms rely more on their relationship lenders when raising new funds. Additional tests exploring the channel effects show that the effects of risk-taking on relationship lenders retention are magnified when the interest rate is lower, when the maturity is longer, and when the firm size is larger. Overall, these findings establish a link between relationship lending and risk-taking, and suggest that high operating risk borrowers may need to rely more on their relationship lenders when these firms demand new loans.