Distance, Lending Relationships and Competition

H.A. Degryse, S. Ongena

Research output: Working paperDiscussion paperOther research output

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Abstract

A recent string of theoretical papers highlights the importance of geographical distance in explaining pricing and availability of loans to small firms.Lenders located in the vicinity of small firms have significantly lower monitoring and transaction costs, and hence considerable market power if competing financiers are located relatively far.We directly study the effect on loan conditions of the geographical distance between firms, the lending bank, and all other banks in the vicinity.For our study, we employ detailed contract information from more than 15,000 bank loans to small firms and control for relevant relationship, loan contract, bank branch, firm, and regional characteristics.We report the first comprehensive evidence on the occurrence of spatial price discrimination in bank lending.Loan rates decrease in the distance between the firm and the lending bank and increase similarly in the distance between the firm and competing banks.Both effects are statistically significant and economically relevant, are robust to changes in model specifications and variable definitions, and are seemingly not driven by the modest changes over time in lending technology we infer.
Original languageEnglish
Place of PublicationTilburg
PublisherFinance
Number of pages51
Volume2002-16
Publication statusPublished - 2002

Publication series

NameCentER Discussion Paper
Volume2002-16

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Lending relationships
Bank lending
Loans
Small firms
Bank branches
Market power
Transaction costs
Loan rates
Monitoring costs
Spatial price discrimination
Bank loans
Model specification
Lending
Pricing

Keywords

  • pricing
  • bank lending
  • price discrimination

Cite this

Degryse, H. A., & Ongena, S. (2002). Distance, Lending Relationships and Competition. (CentER Discussion Paper; Vol. 2002-16). Tilburg: Finance.
Degryse, H.A. ; Ongena, S. / Distance, Lending Relationships and Competition. Tilburg : Finance, 2002. (CentER Discussion Paper).
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Degryse, HA & Ongena, S 2002 'Distance, Lending Relationships and Competition' CentER Discussion Paper, vol. 2002-16, Finance, Tilburg.

Distance, Lending Relationships and Competition. / Degryse, H.A.; Ongena, S.

Tilburg : Finance, 2002. (CentER Discussion Paper; Vol. 2002-16).

Research output: Working paperDiscussion paperOther research output

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T1 - Distance, Lending Relationships and Competition

AU - Degryse, H.A.

AU - Ongena, S.

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N2 - A recent string of theoretical papers highlights the importance of geographical distance in explaining pricing and availability of loans to small firms.Lenders located in the vicinity of small firms have significantly lower monitoring and transaction costs, and hence considerable market power if competing financiers are located relatively far.We directly study the effect on loan conditions of the geographical distance between firms, the lending bank, and all other banks in the vicinity.For our study, we employ detailed contract information from more than 15,000 bank loans to small firms and control for relevant relationship, loan contract, bank branch, firm, and regional characteristics.We report the first comprehensive evidence on the occurrence of spatial price discrimination in bank lending.Loan rates decrease in the distance between the firm and the lending bank and increase similarly in the distance between the firm and competing banks.Both effects are statistically significant and economically relevant, are robust to changes in model specifications and variable definitions, and are seemingly not driven by the modest changes over time in lending technology we infer.

AB - A recent string of theoretical papers highlights the importance of geographical distance in explaining pricing and availability of loans to small firms.Lenders located in the vicinity of small firms have significantly lower monitoring and transaction costs, and hence considerable market power if competing financiers are located relatively far.We directly study the effect on loan conditions of the geographical distance between firms, the lending bank, and all other banks in the vicinity.For our study, we employ detailed contract information from more than 15,000 bank loans to small firms and control for relevant relationship, loan contract, bank branch, firm, and regional characteristics.We report the first comprehensive evidence on the occurrence of spatial price discrimination in bank lending.Loan rates decrease in the distance between the firm and the lending bank and increase similarly in the distance between the firm and competing banks.Both effects are statistically significant and economically relevant, are robust to changes in model specifications and variable definitions, and are seemingly not driven by the modest changes over time in lending technology we infer.

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Degryse HA, Ongena S. Distance, Lending Relationships and Competition. Tilburg: Finance. 2002. (CentER Discussion Paper).