Abstract Financial life-cycle theory outlines how the firm size-age continuum shapes the financing choices of firms in terms of the sources of finance available to them and is rooted in information-based problems that impact with greater severity on smaller and younger firms. Logically, it follows that these features should also be present in banks’ loan interest rate setting processes and result in higher loan interest rate offers to smaller and younger firms. Most studies have explored size and age effects independently, and this has rarely been explored simultaneously. In this study, we consider how the interaction of firm size and age from micro new firms to large well-established firms impacts on loan interest rates. Using a large loan contract dataset for the UK, we find that the estimated average interest rate difference at the extremes is 5.43%, but that new firms of any size class tend to receive lower interest rate offers than early-stage firms of the same size class. We conclude that the financial life-cycle theory can also be extended to loan interest rate setting, but that lenders tend to subsidise loans to new firms which suggests a long-term lock-in strategy.
Cowling et al. (Mon,) studied this question.