Benefits from Lending Relationships in Public Debt Markets: Empirical Evidence from the Commercial Paper Market

There is a large and growing body of literature on the benefits of established lending relationships with banks, which is an intermediated debt market. We extend that literature by testing for benefits from direct lending relationships in the commercial paper market, which is a public debt market. Diamond (1991) suggests that firms access public debt markets when they have enough reputation to no longer require the close monitoring by banks. Using daily rate data for dealer-placed and directly placed commercial paper, we find that the year-end liquidity squeeze is less pronounced in the directly place commercial paper than in the dealer-placed commercial paper, consistent with the existence of benefits from direct lending relationships in this public debt market.