Information Verifiability, Bank Organization, Bank Competition and Bank-Borrower Relationships

Author Name KANO Masaji  (Faculty of Economics, Osaka Prefecture University) /UCHIDA Hirofumi  (Faculty of Economics, Wakayama University) /Gregory F. UDELL  (Kelley School of Business, Indiana University) /WATANABE Wako  (Graduate School of Economics and Management, Tohoku University)
Creation Date/NO. January 2006 06-E-003
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This paper investigates whether the benefits of bank-borrower relationships differ depending on three factors identified in the theoretical literature: verifiability of information, bank size and complexity, and bank competition. We extend the current literature by analyzing how relationship lending affects loan contract terms and credit availability in an empirical model that simultaneously accounts for all three of these factors. Also, our unique data set of Japanese SMEs allows us to examine for the first time using micro firm data the value of information verifiability in the form of audited financial statements in setting loan contract terms. We find that firms benefit most from bank-borrower relationships when they do not have audited financial statements and when they borrow from small banks in less competitive markets, which is consistent with a number of different theoretical studies.