Lender Trust and Bank Loan Contracts

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

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