Lender-borrower Interactions and Loan Contracting


We examine the role of lender-borrower interactions in commercial lending using proprietary data of loan officers’ records from a global bank. First, we show that these interactions are driven by borrowers’ business prospects, riskiness, and loan officers’ capacity. Next, we find that interactions improve loan pricing efficiency (i.e., the predictability of interest rate to loan defaults), and that loan officers are more likely to use interactions to approve loans than to reject loans, especially towards the end of the calendar quarter. These results are consistent with the notion that loan officers collect soft information during interactions and use the information selectively. We further document interactions to be more useful when loan officers cannot rely on alternative information sources. Finally, consistent with loan officers better able to collect soft information in synchronous interactions and in non-relationship-building interactions, we find larger beneficial effects for these interactions. Taken together, our study provides novel evidence on whether and how lender-borrower interactions help lenders mitigate information asymmetry in loan contracting.

For enquiries, please contact Ms. Heidi Lam at heidilam@cuhk.edu.hk.