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Article
Publication date: 14 November 2016

Huajing Hu, Yili Lian and Chih-Huei Su

The purpose of this paper is to examine whether prior bank lending relationships affect firms’ liquidity management.

Abstract

Purpose

The purpose of this paper is to examine whether prior bank lending relationships affect firms’ liquidity management.

Design/methodology/approach

The authors mainly work on evaluating first, whether prior lending relationships affect corporate cash holdings? and second, whether the cash flow sensitivity of cash varies systemically with lending relationships. Three different ways are used to define lending relationships, including the lending relationship dummy, a firm’s maximum relationship intensity in terms of number of deals across all lenders and a firm’s maximum relationship intensity in terms of dollar amounts across all lenders. In addition, the paper applies two-stage least squares (2SLS) to address the concern of endogeneity between firms’ liquidity management and banking relationships.

Findings

The authors find that firms with lending relationships maintain a lower level of cash holdings and save less cash out of cash flow. Furthermore, the effect of lending relationships is more profound for firms with high cash flow. The results suggest that prior lending relations alleviate information asymmetry, lower the cost of capital and therefore affect firms’ propensity to retain cash and maintain a high level of cash holdings.

Research limitations/implications

This paper contributes to both the liquidity management literature and the literature on the value of maintaining lending relationships with banks. Researchers should take into consideration the lending relationships built over the course of the lending when assessing firms’ cash policies.

Social implications

Bank lending relationship mitigates the information asymmetry problem, one type of market friction, and facilitates firms’ future external financing, thereby affecting firms’ cash policies and giving more flexibility in liquidity management. The value of lending relationships distinguishes bank loans from public bonds. Therefore, firms, especially those facing more information asymmetry issue, should take into account the benefits from lending relationships in their future debt financing.

Originality/value

Extant literature examines how firm characteristics affect firms’ cash holdings. This paper introduces a new factor that could explain corporate cash policy.

Details

Review of Accounting and Finance, vol. 15 no. 4
Type: Research Article
ISSN: 1475-7702

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Article
Publication date: 29 April 2014

Brady E. Brewer, Christine A. Wilson, Allen M. Featherstone and Michael R. Langemeier

The purpose of this paper is to examine the use of single vs multiple lenders by Kansas farms. Previous studies suggest that as the risk level of the firm changes…

Abstract

Purpose

The purpose of this paper is to examine the use of single vs multiple lenders by Kansas farms. Previous studies suggest that as the risk level of the firm changes, borrowers desire to enhance the probability of obtaining credit at the lowest possible cost may cause them to use multiple lenders.

Design/methodology/approach

A model is adopted from the banking literature to describe farm behavior in obtaining credit from a single vs multiple lenders. Using farm-level data from the Kansas Farm Management Association, an empirical model analyzes how farm characteristics affect the number of lending relationships. A model is developed to analyze the number of lending relationships effect on the profitability of the farm.

Findings

It is found that highly leveraged farms seek additional lending relationships supporting the theoretical model and that additional lending relationships correlate to a decrease in profitability. Roughly, 50 percent of Kansas farmers that borrow use a single lender. Roughly 48 percent use from two to four lenders, with the remaining 2 percent using more than four lenders.

Originality/value

Provides empirical results to support developed theoretical framework on the number of lending institutions. This study helps understand factors correlated to a farmer's decision to use multiple lenders. Analyzing the number of lending relationships helps understand how farmers manage their debt to maintain access to credit when needed at the lowest possible cost.

Details

Agricultural Finance Review, vol. 74 no. 1
Type: Research Article
ISSN: 0002-1466

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Article
Publication date: 5 September 2019

Niklas Arvidsson, Sara Jonsson and Lotta Karin Snickare

The purpose of this paper is to apply a capability perspective to investigate the shift from relationship lending to transaction lending in a bank’s corporate segment. The…

Abstract

Purpose

The purpose of this paper is to apply a capability perspective to investigate the shift from relationship lending to transaction lending in a bank’s corporate segment. The authors investigate the impact of three operational capabilities: assisting corporate clients in funding and business operations, management of customer relationships and internal cooperation on performance in relationship and transaction lending.

Design/methodology/approach

The primarily empirical material comprises longitudinal survey data, collected on three occasions during the period 1998 throughout 2001 from one of Sweden’s largest banks. Data are analyzed using factor analysis and OLS regression.

Findings

Results show that the effects of the three capabilities are contingent on the type of lending strategy: In relationship lending, assisting corporate clients has no significant direct effect on performance; however, it has an indirect effect on performance via the management of customer relationships. In transaction lending, assisting corporate clients has a direct effect on performance, and this effect becomes stronger as the transaction strategy is further implemented. The results also show that the direct effect of the management of customer relationships and cooperation on performance is significant in both strategies; however, the relation is stronger in relationship lending compared with transaction lending.

Originality/value

The findings indicate that the choice of lending strategy is more complex than a choice between a strict relationship strategy and a strict transaction strategy and that a strategy that leads to competitive advantage includes elements of both strategies.

Details

Managerial Finance, vol. 45 no. 9
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 17 June 2020

Zakaria Boulanouar, Stuart Locke and Mark Holmes

The purpose of this paper is to answer the increasing calls to analyse how lending relationship between banks and their small- and medium-sized enterprises (SMEs) work…

Abstract

Purpose

The purpose of this paper is to answer the increasing calls to analyse how lending relationship between banks and their small- and medium-sized enterprises (SMEs) work. More precisely, the main aim is to investigate the lending approach(es) and criteria used by banks to assess loan applications from their relationship-managed (RM) SMEs’ clients. Other objectives include investigating the level of congruence in terms of lending practices and processes among the sample banks in New Zealand (NZ) and to discern how the assessment of the SME owner/manager is done within the relationship-banking framework.

Design/methodology/approach

The research objectives concern investigating processes and not variances. Thus, a qualitative research approach was used. Extensive data was collected via interviews across representative banks in NZ and thematic analysis was used to analyse the data.

Findings

The findings include a detailed analysis of how relationship banking actually works; how in NZ, the main bank brands use three criteria of lending (financials, security and character) as a framework of assessing loan applications from RM-clients – which is different from the character, capital, capacity, conditions, and collateral (5Cs) that are widely used and discussed as the framework of lending; and an elucidation as to why and how character assessment is different from the other criteria of lending.

Originality/value

To the best of authors’ knowledge, this is the first study to investigate the mechanisms and processes that banks use to deal with their RM-SMEs, show the existence of a different framework of lending other than the 5Cs and attempt an explanation as to why character evaluation is different from that of the other criteria of lending.

Details

Qualitative Research in Financial Markets, vol. 12 no. 4
Type: Research Article
ISSN: 1755-4179

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Article
Publication date: 7 January 2019

Irene Bengo and Marika Arena

The purpose of this paper is to perform a critical analysis of the relationship between small- and medium-sized social enterprises (SMSEs) and banks. Based on the…

Abstract

Purpose

The purpose of this paper is to perform a critical analysis of the relationship between small- and medium-sized social enterprises (SMSEs) and banks. Based on the conceptual framework for the analysis of SME’s credit availability developed by Berger and Udell (2006), this study aims to contribute to the current debate in two ways: first, outlining the characteristics of the lending technologies currently used by banks and financial institutions to evaluate SMSEs when they apply for credit; and second, discussing, based on the results of the empirical analysis, the coherence of these systems from the social ecosystem perspective and identifying areas for possible improvement.

Design/methodology/approach

The paper develops a conceptual framework based on the model proposed by Berger and Udell (2006), which defines the characteristics of lending technologies that banks use to evaluate SMEs, and applies it to the case of SMSEs. To study the interplay of these lending technologies, the empirical analysis is based on a case study of five Italian banks. Data are collected from multiple sources to capture key dimensions of the problems analyzed.

Findings

The paper provides empirical insight about the relationship between SMSEs and banks. The Italian case shows that the current lending infrastructure must be revised to support SMSE credit availability, and government policies affect the national financial institution structure. The relationship between SMSEs and Italian banks remains underdeveloped.

Social implications

The research supports the scaling up of social business.

Originality/value

This paper fulfills an identified need to study how social enterprises credit access can be enabled.

Details

International Journal of Productivity and Performance Management, vol. 68 no. 2
Type: Research Article
ISSN: 1741-0401

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Book part
Publication date: 2 December 2013

Angelina Nikitenko Christie

To provide a selective review of most recent developments in experimental economics of banking and lending and to summarize and synthesize the experiment designs and…

Abstract

Purpose

To provide a selective review of most recent developments in experimental economics of banking and lending and to summarize and synthesize the experiment designs and results in banking under asymmetric information.

Methodology

The review includes recently published or working papers (2006–2013) that exclusively employ experimental economics methodology, especially for studying the impact of formal or informal institutions on lending in credit markets.

Findings

The results of the reviewed experimental studies provide support for the important role of both informal (e.g., relationship banking and reputation) and formal (e.g., third-party enforcement; collateral) institutions and their impact on credit market performance, as well as the importance of studying the interaction of the two types of institutions.

Research limitations/implications

The number of studies reviewed is fairly small but growing, indicating that this is the area of growing significance.

Practical implications

Controlled economic experiments are better able to address the questions regarding the direction of causality in empirical relationships. Economic experiments are particularly useful in studying complex markets like credit and capital and in eliciting specific effects of institutions on credit market performance. Such well-established empirical relationships will be able to provide guidance for policy making for financial market reform.

Originality/value

This is the first review of laboratory research in banking and lending under asymmetric information that aims to call attention to this area of research and serves as a starting point for an interested researcher and provide future direction.

Details

Experiments in Financial Economics
Type: Book
ISBN: 978-1-78350-141-0

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Book part
Publication date: 1 November 2008

Hirofumi Uchida, Gregory F. Udell and Nobuyoshi Yamori

This chapter empirically investigates how banks evaluate the creditworthiness of small- and medium-sized enterprises (SMEs). Following SME loan underwriting literature…

Abstract

This chapter empirically investigates how banks evaluate the creditworthiness of small- and medium-sized enterprises (SMEs). Following SME loan underwriting literature that distinguishes among different lending technologies, we test whether the typical SME bank loan is underwritten primarily based on just a single technology. We find that although financial statement lending is the most commonly used and serves as a kind of basic technology, it tends not to be used to the exclusion of other technologies. These findings imply that, at least in Japan, SME lending practice may be inconsistent with academic research on how banks underwrite loans elsewhere.

Details

Institutional Approach to Global Corporate Governance: Business Systems and Beyond
Type: Book
ISBN: 978-1-84855-320-0

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Article
Publication date: 21 September 2012

Carl‐Christian Trönnberg and Sven Hemlin

The purpose of this paper is to analyze recent findings in the research on bankers' lending decision making, to merge relevant findings in psychology and economics and…

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Abstract

Purpose

The purpose of this paper is to analyze recent findings in the research on bankers' lending decision making, to merge relevant findings in psychology and economics and create a comprehensive review of the literature.

Design/methodology/approach

The authors used a systematic article search for empirical studies when conducting the research.

Findings

The findings are analyzed on the basis of human decision‐making research. The results of the review are three conclusions about loan officers' decision making: their dependency on bank characteristics, their decision‐making biases, and their deliberate and intuitive reasoning approaches.

Originality/value

The paper's findings are important, both as a summary of the literature on lending decision making and also as a foundation for future research.

Details

Managerial Finance, vol. 38 no. 11
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 16 April 2020

Yane Chandera and Lukas Setia-Atmaja

This study examines the impact of firm-bank relationships on bank loan spreads and the mitigating role of firm credit ratings on that impact.

Abstract

Purpose

This study examines the impact of firm-bank relationships on bank loan spreads and the mitigating role of firm credit ratings on that impact.

Design/methodology/approach

The study sample consists of Indonesian publicly listed companies for the period 2006 to 2016; bank-loan data was extracted from the Loan Pricing Corporation Dealscan database. For the degree of firm-bank relationships, the data on each loan is manually computed, using five different methods taken from Bharath et al. (2011) and Fields et al. (2012). All of the regression analyses are controlled for the year fixed effects, heteroscedasticity, and firm-level clustering. To address the endogeneity issues, this study uses several methods, including partitioning the sample, running nearest-neighbour and propensity score matching tests, and using instrumental variables in two-staged least-squares regression models.

Findings

In line with relationship theory and in opposition to the hold-up argument, this study finds that lending relationships reduce bank loan spreads and that the impact is more noticeable among non-rated Indonesian firms. Specifically, each additional unit in the total number of years of a firm-bank relationship and the number of previous loan contracts with the same bank are associated with 7.34 and 9.15 basis-point decreases, respectively, in these loan spreads.

Practical implications

Corporations and banks should maintain close, long-term relationships to reduce the screening and monitoring costs of borrowing. Regulators should create public policies that encourage banks to put more emphasis on relationships in their lending practices, especially in relation to crisis-prone companies.

Originality/value

To the best of the authors’ knowledge, this is the first study to examine the impact of lending relationships on bank loan spreads in Indonesia. The study offers insights on banking relationships in emerging markets with concentrated banking industries, underdeveloped capital markets and prominent business-group affiliations.

Details

International Journal of Managerial Finance, vol. 16 no. 4
Type: Research Article
ISSN: 1743-9132

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Article
Publication date: 12 February 2018

Lucia Gibilaro and Gianluca Mattarocci

This paper aims to analyse the exposure at default (EAD) in the event of multiple banking relationships to understand the differences with respect to solo banking…

Abstract

Purpose

This paper aims to analyse the exposure at default (EAD) in the event of multiple banking relationships to understand the differences with respect to solo banking relationships and forecast the banks risk exposure.

Design/methodology/approach

The paper uses a unique database provided by the Italian public credit register representative of the full Italian market before the financial crisis. The analysis compares different EAD risk proxies for debtors with unique and multiple banking relationships to underline the main differences among the two groups.

Findings

Results show that EAD forecast could be improved considering the existence of exposures with other lenders and banks that consider such type of information can reduce the risk of underestimating the risk exposure of a debtor.

Originality/value

The paper is the first attempt to model the EAD on the basis of the existence of multiple lending exposures. Results demonstrate a different lender’s risk exposure for debtors with multiple credit risk exposure and show the usefulness of the information about the overall system exposure in evaluating the risk exposure related to this type of customers.

Details

Journal of Financial Regulation and Compliance, vol. 26 no. 1
Type: Research Article
ISSN: 1358-1988

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