Lender Trust and Bank Loan Contracts

Abstract

We examine the contractual implications of a lender’s trust for corporate loans. We measure how trusting a lender is using the average trust attitude in the chief executive officer’s ancestral country of origin. We find that banks with trusting CEOs charge lower interest rates in U.S. 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.

This paper was accepted by Gustavo Manso, finance.

Supplemental Material: The internet appendix and data are available at https://doi.org/10.1287/mnsc.2022.4371 .