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Conference of 2007
Finance Center Münster
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Debt maturity is an important element in financial contracting that ultimately affects the borrower’s financial flexibility and financing costs. We investigate the relation between borrower risk and loan maturity in small business lending which represents a well-suited institutional environment to study financial contracting under asymmetric information. Analyzing data on new loan approvals and renewals made by a German bank in 2005, we find a robust, significantly positive and monotonic risk-maturity relation. This relation is stronger for loans granted under relatively high asymmetric information and weaker if borrower bargaining power is high. Our results are consistent with theoretical models on adverse selection and the view that relationship lenders concede favorable loan terms to those borrowers that are most likely to need a “helping hand”.
Abstract
The relation between borrower risk and loan maturity in small business lending
Kirschenmann, Karolin; Norden, LarsDebt maturity is an important element in financial contracting that ultimately affects the borrower’s financial flexibility and financing costs. We investigate the relation between borrower risk and loan maturity in small business lending which represents a well-suited institutional environment to study financial contracting under asymmetric information. Analyzing data on new loan approvals and renewals made by a German bank in 2005, we find a robust, significantly positive and monotonic risk-maturity relation. This relation is stronger for loans granted under relatively high asymmetric information and weaker if borrower bargaining power is high. Our results are consistent with theoretical models on adverse selection and the view that relationship lenders concede favorable loan terms to those borrowers that are most likely to need a “helping hand”.