Document Type
Article
Keywords
DIP financing, bank loans, debtor-in-possession, financial intermediaries, lending practices, lock-in effects, relationship lending
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 m
Publication Date
11-1-2012
DOI
10.2139/ssrn.1785686
Recommended Citation
Hasan, Iftekhar; Ramirez, Gabriel G.; and Zhang, Gaiyan, "Lock-In Effects in Relationship Lending: Evidence from Dip Loans" (2012). Ed G. Smith College of Business Faculty Works. 23.
DOI: https://doi.org/10.2139/ssrn.1785686
Available at:
https://irl.umsl.edu/business-faculty/23
COinS
Comments
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-inpossession (DIP) financing often fit this profile. We investigate the presence of lock-in effects using a sample of DIP loans. We first account for selectivity bias by using the inverse mills ratio form a first stage. Then, in a second stage, we jointly estimate the relationship between loan price and non-price terms accounting for selectivity bias. We find that the existence and intensity of prior lending relationships are associated with higher interest costs, longer maturities, and smaller DIP loans. Taken together, our study provides direct evidence that prior lending relationships do create a lock-in effect under certain circumstances, such as DIP financing.