The Effect of Relationship Lending on Firm Performance

Abstract

We examine how relationship lending a®ects ¯rm performance using a panel dataset of about 70,000 small and medium Spanish ¯rms in the period 1993- 2004. We model ¯rm performance jointly with the ¯rm's choice of the number of bank relationships. Controlling for ¯rm ¯xed e®ects and using instrumental variables for the decision on the number of bank relationships, we ¯nd that ¯rms maintaining exclusive bank relationships have lower pro¯tability. The result is consistent with the view that banks appropriate most of the value generated through close relationships with its borrowers as long as they do not face competition from other lenders.

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