The Benefits of Lending Relationships: Evidence from Small Business Data




    Search for more papers by this author
    • Graduate School of Business, University of Chicago. Petersen thanks the Center for Research on Securities Prices while Rajan thanks the Graduate School of Business at the University of Chicago for funding. We thank Andrew Alford, Bob Aliber, Douglas Diamond, William Dunkelberg, Philip Dybvig, Anne Grøn, Oliver Hart, Steven Kaplan, Anil Kashyap, Randy Kroszner, Chris Lamoureaux, Mark Mitchell, David Rudis, and Rob Vishny for valuable comments. We thank René Stulz, the editor, and an extremely thoughtful referee for many valuable suggestions. We also benefitted from the comments of participants at the NBER Summer Workshop on Corporate Finance, the Finance Workshops at the University of Chicago and Washington University, St. Louis, the Financial Markets Group at the London School of Economics, and the Western Finance Association Meetings.


This paper empirically examines how ties between a firm and its creditors affect the availability and cost of funds to the firm. We analyze data collected in a survey of small firms by the Small Business Administration. The primary benefit of building close ties with an institutional creditor is that the availability of financing increases. We find smaller effects on the price of credit. Attempts to widen the circle of relationships by borrowing from multiple lenders increases the price and reduces the availability of credit. In sum, relationships are valuable and appear to operate more through quantities rather than prices.