The Information Content from Lending Relationships Across the Supply Chain

Using unique data on between-firm payments and bank to firm lending, we investigate whether bank relationships across firms connected through product market ties affect the provision of loans to these firms. We show that the loans provided by a bank to a firm increase when the bank also lends to one of the firm’s trade partners (customers or suppliers). Negative information about the creditworthiness of a firm’s trading partner is acknowledged by common lending banks, which reduce the loan amount, increases the cost, and reduces the duration of loans provided to the firm. These results suggest that lending to firms connected through the supply chain conveys valuable information to banks