| Abstract: |
This paper studies how credit constraints develop over bank relationships. I
analyze a unique dataset of matched loan application and loan contract
information and measure credit constraints as the ratio of requested to
granted loan amounts. I find that the most important determinants of receiving
smaller than requested loan amounts are firm age and size at the time of the
first interaction between borrower and bank. Over loan sequences, credit
constraints decease most pronouncedly in the beginning of relationships and
for the initially young and small firms. Moreover, the structure of the
dataset allows me to disentangle the demand and supply effects behind these
observed credit constraints. I find that the gap between requested and granted
loan amounts decreases because both sides converge. If previous credit
constraints were large, requested amounts increase more moderately, while
granted amounts increase more strongly than in the case of small previous
constraints. The findings are a sign of the use of dynamic incentives at the
bank side to overcome information problems when contracting repeatedly with
opaque borrowers. The results further suggest that, particularly in the
beginning of a bank relationship, borrowers learn from their previous
experience with credit constraints and adjust their demand accordingly. |