Distance, Lending Relationships, and Competition.pdf

THE JOURNAL OF FINANCE ? VOL. LX, NO. 1 ? FEBRUARY 2005 Distance, Lending Relationships, and Competition HANS DEGRYSE and STEVEN ONGENA? ABSTRACT We study the effect on loan conditions of geographical distance between firms, the lending bank, and all other banks in the vicinity. For our study, we employ detailed contract information from more than 15,000 bank loans to small firms comprising the entire loan portfolio of a large Belgian bank. We report the first comprehensive evidence on the occurrence of spatial price discrimination in bank lending. Loan rates decrease with the distance between the firm and the lending bank and increase with the distance between the firm and competing banks. Transportation costs cause the spatial price discrimination we observe. BANKS DERIVE MARKET POWER ex ante from their relative physical proximity to the borrowing firms or ex post from private information they obtain about firms during the course of the lending relationship. Banks located closer to borrowing ?Hans Degryse is from KU Leuven and CentER, Tilburg University. Steven Ongena is from CentER, Tilburg University and CEPR. The authors are especially indebted to an anonymous referee, Robert Hauswald, and Robert Marquez for many insightful comments. We also received valuable comments from Adam Ashcraft, Allen Berger, Clive Bell, Arnoud Boot, Jan Bouckaert, Santiago Carbo? Valverde, Elena Carletti, Giovanni Dell’Ariccia, Jurgen Eichberger, Thomas Gehrig, Hans Gersbach, Rick Green (the editor), Larry Goldberg, Reint Gropp, Timothy Hannan, Philipp Hartmann, Roman Inderst, Tulio Jappelli, Abe de Jong, Robert Lensink, Ernst Maug, Phil Molyneux, Theo Nijman, Marco Pagano, Maria Fabiana Penas, Mitch Petersen, Nagpurnanand Prabhala, Joao Santos, Alessandro Sbuelz, Elmer Sterken, Linda Toolsema-Veldman, Greg Udell, Martijn Van Dijck, Frank Verboven, Philip Vermeulen, Jurgen Weigand, and Gunther Wuyts, and participants at the 2003 American (Washington, DC), 2003 European (Glasgow), and