Firm Failure and Relationship Lending:New Evidence from Small Businesses

Abstract

We study the effect of relationship lending on small firms failure probability using a uniquely rich data set comprised of information on individual loans of a large number of small firms in Colombia. We control for firm-specific variables and find that small firms involved in long-term liaisons with commercial banks have a significantly lower probability of becoming bankrupt than otherwise identical firms not involved in a long-term credit relationship. We also find that small firms with multiple banking relationships face a lower failure hazard than otherwise identical firms involved in a unique long-term relationship.Firms, bank relationships, survival analysis. Classification JEL: G20, G21, C40.