The effect of information opacity and accounting irregularities on personal lending relationships: Evidence from lender and manager co-migration

Established relationships with a borrower is one of the primary channels through which lenders reduce agency problems and information asymmetry in debt contracting. Given the critical role individual managers play in shaping corporate policies and performance, we investigate the importance of lenders' relationships with individual managers and their impact on lending practices. Utilizing a setting of executive turnovers, we find that a lender is 1.6 times more likely to start a lending relationship with a firm when a manager with whom it has a prior lending relationship is hired by the firm as a top executive. We also find that the likelihood of a lender's co-migration with a manager is higher when the firm is more opaque, consistent with the higher importance of prior relationships in poor information environments. We next show that co-migration benefits the borrowing firm through greater access to credit and a lower cost of financing. Further, a stronger lender-manager relationship increases the likelihood of a lender's co-migration with the manager, especially when the lender is under pressure to expand her lending portfolio and seek new borrowers. Overall, our paper provides novel evidence on the importance of lender-manager relationships in credit markets.