Publications
Publications
- 2016
The Attenuating Effect of Banking Relationships on Credit Market Disruption
By: Stefan Dimitriadis and Mike Horia Teodorescu
Abstract
This article examines how the relationship between banks and corporations moderates the effect of credit market disruptions. The 2008-09 financial crisis led to a dramatic restriction in the supply of credit to corporations via the syndicated loan market (Chodorow-Reich 2014; Ivashina and Scharfstein 2010a). We examine whether this shock was moderated by the strength of pre-crisis relationships between corporations and banks. By accounting for the strength of lending relationships in Chodorow-Reich’s (2014) baseline model of lender-borrower relationships we find partial evidence that relationships attenuate credit shocks. Specifically, we find that corporations that were more closely tied to banks suffered weaker credit shocks during the financial crisis. Otherwise stated, the strength of the corporation-bank relationship attenuated the effect of the credit shock. This result contributes to the literature on the effects of credit disruptions on firms and the literature on lending relationships between firms and banks. Furthermore, through careful analysis of the Chodorow-Reich model, we were able to determine that an instrument used in the literature may not, in fact, be appropriate for small sized banks.
Keywords
Citation
Dimitriadis, Stefan, and Mike Horia Teodorescu. "The Attenuating Effect of Banking Relationships on Credit Market Disruption." Working Paper, July 2016.