Distance, Lending Relationships, and Competition

A recent string of theoretical papers has highlighted the importance of geographical distance in explaining loan rates for small firms.Lenders located in the vicinity of small firms face significantly lower transportation and monitoring costs, and hence wield considerable market power, if competing financiers are located relatively far from the borrowing firms.We study the effect on loan conditions of geographical distance between firms, the lending bank, and all other banks in the vicinity.For our study we employ detailed contract information from more than 15,000 bank loans to small firms comprising the entire loan portfolio of a large Belgian bank.We control for relevant relationship, loan contract, bank branch, firm, and regional characteristics.We report the first comprehensive evidence on the occurrence of spatial price discrimination in bank lending.Loan rates decrease with the distance between the firm and the lending bank and similarly increase with the distance between the firm and competing banks.The effect of distance on the loan rate is statistically significant and economically relevant.Robust to changes in model specifications and variable definitions, the effect is seemingly not driven by the modest changes over time in lending technology that we infer.We deduce that transportation costs cause the spatial price discrimination we observe.prices;credit;banks;competition;bank lending

The Impact of Competition on Bank Orientation

How do banks react to increased competition?Recent banking theory offers conflicting predictions about the impact of competition on bank orientation - i.e., the choice of relationship based versus transactional banking.We empirically investigate the impact of interbank competition on bank branch orientation.We employ a unique data set containing detailed information on bank-firm relationships.We find that bank branches facing stiff local competition engage considerably more in relationship-based lending.Our results illustrate that competition and relationships are not necessarily inimical.bank orientation;bank industry specialization;competition;lending relationships

Bank Relationship and Firm Profitability

This paper examines how bank relationships affect firm performance. An empirical implication of recent theoretical models is that firms maintaining multiple bank relationships are less profitable than their single-bank peers. We investigate this empirical implication using a data set containing virtually all Norwegian publicly listed firms for the period 1979-1995. We find that profitability is substantially higher if firms maintain only a single bank relationship. We also find that firms replacing a single bank relationship are on average smaller and younger than firms not replacing a single bank relationship.bank relationships;firm profitability

The Impact of Competition on Bank Orientation and Specialization

How do banks react to increased interbank competition?Recent banking theory offers conflicting predictions about the impact of competition on bank orientation í L H WKH choice of relationship based versus transactional banking í DQG EDQN LQGXVWU\ specialization.We empirically investigate the impact of interbank competition on bank branch orientation and specialization.We employ a unique data set containing detailed information on bank-firm relationships and industry classification.We find that bank branches facing stiff local competition engage relatively more in relationship-based lending but specialize somewhat less in a particular industry.Our results illustrate that competition and relationships are not necessarily inimical.competition;banks;bank lending

Distance, lending relationships and competition.

Competition;