The Relationship between Borrower Risk and Loan Maturity in Small Business Lending

We investigate the relationship between borrower risk and loan maturity in small business lending. Using a rich dataset on new loans extended to German firms, we find a robust, significantly positive, monotonic risk-maturity relation. We show that this relation becomes stronger when asymmetric information is high and weaker when borrower bargaining power is high, and that borrower bargaining power affects the risk-maturity relation differently depending on whether asymmetric information is high or low. Our results show that both the signalling hypothesis and view that relationship lenders provide assistance to borrowers explain the positive risk-maturity relation, and that borrower bargaining power influences this relation.