Borrowing from friends of friends: Indirect social networks and bank loans

Publication Type

Journal Article

Publication Date

5-2026

Abstract

We examine how indirect connections (i.e., friends of friends), an important yet understudied feature of social networks, may affect bank loan contracts. Using a sample of bank loans issued by U.S. public firms, we find that indirect networks built on board interlocks significantly reduce loan spreads. However, bank monitoring and loan quality are negatively affected, suggesting that indirect networks may give rise to favoritism treatment by banks. A novel set of difference-in-difference tests exploiting changes in higher-order network structures provides the network foundation and lends support to a causal interpretation of our findings. Overall, our results suggest that indirect connections within social networks, specifically through board interlocks, can have significant economic impacts on bank loan contracts.

Keywords

social networks, indirect connections, bank loans, loan spreads, covenants

Discipline

Finance | Finance and Financial Management

Research Areas

Finance

Publication

Management Science

Volume

72

Issue

5

First Page

4144

Last Page

4172

ISSN

0025-1909

Identifier

10.1287/mnsc.2024.07536

Publisher

Institute for Operations Research and Management Sciences

Additional URL

https://doi.org/10.1287/mnsc.2024.07536

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