Relationship lending and entrepreneurial behavior: Analyzing empirical evidences Book in Scopus uri icon

abstract

  • © The Editor(s) (if applicable) and The Author(s), under exclusive licence to Springer International Publishing AG, part of Springer Nature 2019. It is often complex for the financial institution to explore effective and ineffective incentives for entrepreneurs. Effective incentives for entrepreneurs include, for example, the decrease of the cost of credit and the decrease of the value of the collateral while a good incentive for a financial institution is a decrease of the probability of default of entrepreneurs. As relationship lending increases, more favorable conditions of the credit for the borrower (the entrepreneurs) are granted. The cost of credit decreases, the probability of pledging collateral decreases and value of collateral with respect of the credit decreases as well. In addition, as relationship lending increases, the bank will be rewarded as the probability of default for the entrepreneurs decreases. As the relationship gets stronger, the entrepreneur will be willing to pay the loan back to banks at any circumstances. If the entrepreneur is in distress, they will seek out other financial sources to avoid default. The probability of default decreases when the strength of the relationship increases. The moral hazard problem that banks used to have with entrepreneurs will be diminished when entrepreneurs exert high effort to the project that the bank is financing. An entrepreneur is comfortable exerting high effort rather than low effort when the bank monitors his or her daily activities. Additionally, entrepreneurs have more incentives to interact with banks using the relationship lending technique because the cost of credit decreases when the strength of the relationship increases. As time passes, the conditions for future credits get friendlier. The probability of pledging collateral as well as the value of the requested collateral decreases as the strength of the relationship increases.

publication date

  • January 1, 2018