Shadow seniority? Lending relationships and borrowers’ selective default

Shadow seniority? Lending relationships and borrowers’ selective default

Series: Working Papers. 2420.

Author: Francisco González, José E. Gutiérrez and José María Serena.

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Summary

This paper analyzes how lending relationships affect firms’ incentives to default, drawing on loan-level data in Spain. We provide new evidence showing that firms first default on loans from less important (“non-main”) banks to preserve their most valuable lending relationships. Our findings also indicate that banks integrate this borrower behavior into their credit risk management because the most important banks within a borrower’s set of lending relationships recognize lower discretionary loan impairments. The results are robust to alternative difference-in-difference (DID) analyses and control for potential bank forbearance, loan characteristics, and a variety of time-varying bank and firm fixed effects.

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