The Economics of Bank Cross-Firm Selling: The Value of Borrower Board Connectedness and Opacity

This paper provides evidence that banks value their existing borrowers’ board network because it can give banks an advantage in cross-selling services to other firms in the network. I posit that banks gain an informational advantage from a common shared director between the existing borrower and firms in the borrower's network. I find that if a bank has a lending relationship with a well-connected borrower, then the bank’s likelihood of winning loan business from a firm in the borrower’s board network increases. I also find that banks are willing to compensate well-connected borrowers with larger board networks by offering lower loan spreads because these borrowers provide greater opportunities for their bank lenders to sell loans to firms in their networks. Moreover, consistent with board networks providing connected banks with an informational advantage over other de novo lenders, I find that the probability of a connected bank winning loan business from a firm in its existing borrower’s network is higher if the firm is more informationally opaque. As further evidence of a network-based information advantage, I also find that banks offer lower loan spreads to a well-connected borrower if firms in that borrower’s board network are on average more opaque. This finding indicates that a borrower can benefit from the opacity of its connected firms via lower loan spreads.