Lender Trust and Bank Loan Contracts

Hagendorff, J.; Lim, S.; Nguyen, D.D.

doi:10.1287/mnsc.2022.4371

Lender Trust and Bank Loan Contracts

Hagendorff, J.; Lim, S.; Nguyen, D.D.

Authors

J. Hagendorff

S. Lim

Professor Louis Nguyen duc.d.nguyen@durham.ac.uk
Professor

Abstract

We examine the contractual implications of a lender’s trust in corporate loans. We measure how trusting a lender is using the average trust attitude in the chief executive officer’s (CEO) ancestral country of origin. We find that banks with trusting CEOs charge lower interest rates in US syndicated loans. This effect is identified within existing lender-borrower relationships and similar types of loans. Further analyses indicate that trust reduces the cost of credit by boosting the perceived credibility of borrower information and by mitigating contracting problems. We corroborate our findings by conducting a survey of loan officers with experience in loan syndication.

Citation

Hagendorff, J., Lim, S., & Nguyen, D. (2023). Lender Trust and Bank Loan Contracts. Management Science, 69(3), 1758-1779. https://doi.org/10.1287/mnsc.2022.4371

Journal Article Type	Article
Acceptance Date	Nov 19, 2021
Online Publication Date	Mar 23, 2022
Publication Date	2023-03
Deposit Date	Feb 5, 2022
Publicly Available Date	Feb 16, 2022
Journal	Management Science
Print ISSN	0025-1909
Electronic ISSN	1526-5501
Publisher	Institute for Operations Research and Management Sciences
Peer Reviewed	Peer Reviewed
Volume	69
Issue	3
Pages	1758-1779
DOI	https://doi.org/10.1287/mnsc.2022.4371
Keywords	CEOs, Trust, Cultural values, Financial contracts
Public URL	https://durham-repository.worktribe.com/output/1214975