Cultural Proximity and the Formation of Lending Relationships

We use credit registry data from the population of loans granted to firms in a region hosting two different cultural groups to study the role of culture in the formation of lending relationships. We find a large predominance of lending relationships involving banks and firms of the same culture, particularly among small, young, and opaque firms. Loans to same-culture firms are larger, require less collateral, and default less often than loans to different-culture firms. Our results suggest that cultural proximity reduces information asymmetries by providing a source of soft information that complements the one stemming from close or lengthy relationships.