RFS Advance Access published online on July 2, 2008
Review of Financial Studies, doi:10.1093/rfs/hhn067
On Loan Sales, Loan Contracting, and Lending Relationships
Renaissance Technologies LLC
Duke University and NBER
Address Correspondence to: Manju Puri, Fuqua School of Business, Duke University, One Towerview Drive, Durham, NC 27708-0120; telephone: 919-660-7657; fax: 919-660-8038; email: mpuri{at}duke.edu
JEL Classification: G31, G32
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Abstract |
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This paper examines the secondary market for loan sales and, in particular, loan contract design as a mechanism to resolve informational issues in loan sales and associated costs and benefits. Using loan-level data, we find that sold loans contain additional covenants and more restrictive net worth covenants, particularly when agency and informational problems are more severe. Why do borrowers agree to incur the additional costs associated with loan sales? Our evidence suggests that these borrowers benefit through increased private debt availability. Further, loan sales go hand in hand with more durable lending relationships, suggesting that risk management aids continued relationship lending.
We thank Ken Ayotte, Mitchell Berlin, Arnoud Boot, Florian Heider, Chris Mayer, Mitchell Petersen, Anil Shivdasani, Wei-Ling Song, Anjan Thakor, Haluk Unal, Andy Winton, Ayako Yasuda, and seminar participants at Columbia Business School, Cornell University, the FDIC Center for Financial Research, London School of Economics, Ohio University, Rutgers, Southern Methodist University, SUNY-Binghamton, University of Colorado, University of Michigan, the Washington University, St. Louis, the JFI/ECGI/University of Mannheim Financial Contracting Conference, the Federal Reserve Bank of Chicago Bank Structure Conference, the 6th Annual FDIC Bank Research Conference, NYU/NY Federal Reserve Bank Joint Conference on Financial Intermediation, Corporate Finance Conference, St. Louis, and the Western Finance Association Meetings, Montana, for helpful comments. We acknowledge funding from the FDIC Center for Financial Research.