The Relationship between Borrower Risk and Loan Maturity in Small Business Lending

Authors

  • Karolin Kirschenmann,

  • Lars Norden

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    • The authors are respectively from the School of Economics, Aalto University; and the Rotterdam School of Management, Erasmus University. They are grateful to one anonymous referee, Andrew Stark (editor), Arnoud W.A. Boot, Geraldo Cerqueiro, Claire Cici, Mark Flannery, Mark Flood, Daniel Foos, Jens Grunert, Daniel Sungyeon Kim, Umesh Kumar, Steven Ongena, Richard Shockley, Sascha Steffen, Eva Terberger, Gregory F. Udell, Simone Varotto, Vikrant Vig, Martin Weber, Xiaoyun Yu, Josef Zechner and participants at the Midwest Finance Association Meeting 2008 in San Antonio, the Southwestern Finance Association Meeting 2008 in Houston, the European Banking Symposium 2008 in Milan (ProBanker), the Banking Workshop 2008 in Münster, the German Finance Association Meeting 2008 in Münster, the Swiss Conference on Banking and Financial Intermediation 2008 in Champéry, the Eastern Finance Association Meeting 2008 in St. Pete, and the Washington Area Finance Association Meeting 2008 in Washington DC for useful comments and suggestions. They also thank the bank who provided them with the data.


Lars Norden, Associate Professor of Finance, Rotterdam School of Management, Erasmus University, 3000 DR Rotterdam, the Netherlands. e-mail: lnorden@rsm.nl

Abstract

Abstract:  We investigate the relationship between borrower risk and loan maturity in small business lending. Using a rich dataset on new loans extended to German firms, we find a robust, significantly positive, monotonic risk-maturity relation. We show that this relation becomes stronger when asymmetric information is high and weaker when borrower bargaining power is high, and that borrower bargaining power affects the risk-maturity relation differently depending on whether asymmetric information is high or low. Our results show that both the signalling hypothesis and view that relationship lenders provide assistance to borrowers explain the positive risk-maturity relation, and that borrower bargaining power influences this relation.

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