Lending Relationships and the Collateral Channel*

This article shows that lending relationships insulate corporate investment from fluctuations in collateral values. The sensitivity of corporate investment to changes in real-estate collateral values is halved when the length of relationship between a bank and a firm, or its board of directors, doubles. Long relationships with board members dominate relationships with the firm in dampening the collateral channel. Moreover, lending relationships with directors in their personal capacity insulate corporate investment over and above corporate relationships. Our findings support theories where collateral and private information are substitutes in mitigating credit frictions over the cycle and show that lending relationships are more multi-faceted than previously thought.