Lock‐In Effects in Relationship Lending: Evidence from DIP Loans
Department
Economics, Finance and Quantitative Analysis
Document Type
Article
Publication Date
11-1-2018
Abstract
Do prior lending relationships result in pass‐through savings (lower interest rates) for borrowers, or do they lock in higher costs for borrowers? Theoretical models suggest that when borrowers experience greater information asymmetry, higher switching costs, and limited access to capital markets, they become locked into higher costs from their existing lenders. Firms in Chapter 11 seeking debtor‐in‐possession (DIP) financing often fit this profile. We investigate the presence of lock‐in effects using a sample of 348 DIP loans. We account for endogeneity using the instrument variable (IV) approach and the Heckman selection model and find consistent evidence that prior lending relationship is associated with higher interest costs and the effect is more severe for stronger existing relationships. Our study provides direct evidence that prior lending relationships do create a lock‐in effect under certain circumstances, such as DIP financing.
Journal Title
Journal of Money, Credit and Banking
Journal ISSN
0022-2879,1538-4616
Volume
51
Issue
4
First Page
1021
Last Page
1043
Digital Object Identifier (DOI)
10.1111/jmcb.12569