On loan sales, loan contracting, and lending relationships
This paper examines the secondary market for loan sales and, in particular, loan contract design as a mechanism to resolve informational issues in loan sales and associated costs and benefits. Using loan-level data, we find that sold loans contain additional covenants and more restrictive net worth covenants, particularly when agency and informational problems are more severe. Why do borrowers agree to incur the additional costs associated with loan sales Our evidence suggests that these borrowers benefit through increased private debt availability. Further, loan sales go hand in hand with more durable lending relationships, suggesting that risk management aids continued relationship lending.
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