Relationship Lending and Entrepreneurial Behavior: Analyzing Empirical Evidences

Abstract

The goal of this chapter is to demonstrate empirically that relationship lending creates incentives for both banks and entrepreneurs to interact as lenders and borrowers. The discussion addresses the research questions of what happens (a) to the cost of credit as the relationship matures, (b) to the probability of default for the entrepreneurs as the relationship gets stronger, (c) to the probability of pledging collateral to the entrepreneurs and (d) to the value of the collateral as relationship increases. The empirical evidence suggests that relationship lending creates incentives, while facilitating monitoring and screening because it overcomes the information asymmetries and moral hazard problems that a transaction between lender and borrower carry. The empirical evidence is based on data acquired directly from a bank (Banorte) that lends to entrepreneurs.