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Using the rich matched data set of Japanese firms and their main banks that contain both qualitative and quantitative information of firms and banks, the authors found that financially distressed small banks, which suffer from a large percentage of non-performing loans relative to their size, charge small firms higher lending rates. When, on the other hand, large banks whose business is more transaction based lend to small firms, their financial health is not reflected on the lending rates. These are the evidence that relationship lenders exploit the proprietary information about small firms that they obtain through tight relationships with opaque firms.
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