Who Benefits from Longer Lending Relationships? An Analysis on European SMEs

Abstract

This paper empirically investigates the impact of lending relationships duration on SMEs financial stability. Our research hypothesis is that the balance between benefits and costs of longer bank-firm ties may be different depending on the degree of firms' financial health. Using a large sample of European manufacturing SMEs that excludes firms that have defaulted and those with less than ten employees, we find that the overall positive effect of enduring lending relationships tends to progressively increase for more stable firms, being greater when the main bank operates nearby the firm. Our findings, yet, are conditional on firm survival and may not be generalized to the smallest of firms.

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