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Forgive but not forget: the behaviour of relationship banks when firms are in distress

Schäfer, Larissa, (2016), “Forgive but not forget: the behaviour of relationship banks when firms are in distress”, European Bank for Reconstruction and Development, Μάρτιος

A new EBRD Working Paper studies whether relationship banks help firms in financial distress. Combining a new and direct measure of relationship lending with unique credit registry data, I examine the effect of relationship lending on ex-post loan performance. My findings demonstrate that the same firm is more likely to become temporary delinquent on a relationship-based loan relative to a transaction-based loan. Consistent with theory, relationship banks tolerate temporary bad results, yet extract rents in the long run, that is, they forgive but do not forget.

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