Does Berger and Udell (1998) Financial Life-Cycle Theory Hold for Loan Interest Rates?

Does Berger and Udell (1998) Financial Life-Cycle Theory Hold for Loan Interest Rates? | Research Square window.SnipcartSettings = { analytics: { enabled: false } }; (function() { var accessVector = localStorage.getItem('access_vector') || ''; window.dataLayer = window.dataLayer || []; if (accessVector) { window.dataLayer.push({ user: { profile: { profileInfo: { snid: accessVector } } } }); } })(); (function(w,d,s,l,i){w[l]=w[l]||[];w[l].push({'gtm.start':new Date().getTime(),event:'gtm.js'});var f=d.getElementsByTagName(s)[0],j=d.createElement(s),dl=l!='dataLayer'?'&l='+l:'';j.async=true;j.src='https://www.googletagmanager.com/gtm.js?id='+i+dl;f.parentNode.insertBefore(j,f);})(window,document,'script','dataLayer','GTM-K279D39R'); Browse Preprints In Review Journals COVID-19 Preprints AJE Video Bytes Research Tools Research Promotion AJE Professional Editing AJE Rubriq About Preprint Platform In Review Editorial Policies Our Team Advisory Board Help Center Sign In Submit a Preprint Cite Share Download PDF Research Article Does Berger and Udell (1998) Financial Life-Cycle Theory Hold for Loan Interest Rates? Marc Cowling, Ciarán Mac an Bhaird, Seán O'Reilly, Huan Yang This is a preprint; it has not been peer reviewed by a journal. https://doi.org/ 10.21203/rs.3.rs-8678997/v1 This work is licensed under a CC BY 4.0 License Status: Posted Version 1 posted You are reading this latest preprint version 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. But 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 average interest rates 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. JEL Codes: G21; G40; D24; D25; D53 Bank Loans Firm Size Firm Age Interest Rates Financial Life-Cycle Theory SMEs Full Text Additional Declarations No competing interests reported. Cite Share Download PDF Status: Posted Version 1 posted You are reading this latest preprint version Research Square lets you share your work early, gain feedback from the community, and start making changes to your manuscript prior to peer review in a journal. As a division of Research Square Company, we’re committed to making research communication faster, fairer, and more useful. We do this by developing innovative software and high quality services for the global research community. Our growing team is made up of researchers and industry professionals working together to solve the most critical problems facing scientific publishing. Also discoverable on Platform About Our Team In Review Editorial Policies Advisory Board Help Center Resources Author Services Accessibility API Access RSS feed Manage Cookie Preferences © Research Square 2026 | ISSN 2693-5015 (online) Privacy Policy Terms of Service Do Not Sell My Personal Information {"props":{"pageProps":{"initialData":{"identity":"rs-8678997","acceptedTermsAndConditions":true,"allowDirectSubmit":true,"archivedVersions":[],"articleType":"Research Article","associatedPublications":[],"authors":[{"id":584494191,"identity":"35176536-80b5-4b37-b1aa-3cedebb13a5f","order_by":0,"name":"Marc Cowling","email":"data:image/png;base64,iVBORw0KGgoAAAANSUhEUgAAAZAAAAAyAQMAAABI0h/eAAAABlBMVEX///8AAABVwtN+AAAACXBIWXMAAA7EAAAOxAGVKw4bAAAA5UlEQVRIie2RsQrCMBBAUwp1CWSN+A1CitBJml9JKcTFwU/oVCf3gv6F4FwJ1CUfELBDXJwcMjoI2hY7ttZNMA8OjuMed8cBYLH8KpoAgHCd5W0p7+p9wyplnH2nVEHUUGW6FgVmqzLcnzcXbeScgpHQLpTdSiA5x4xc40N5mvmZ4lECOXGh6lEUDBQjIg4U9ybQiGrJJXChGaDMskZ5UoBuw5SQ4FpRuZPgekrfYpIv7pXCcFm4fibjKMVXctz1nX8SgpiHoGibOtoUIUUovuhb0a20REmbeeDzIxvokCaLxWL5U17j31aZwJgDRgAAAABJRU5ErkJggg==","orcid":"","institution":"Oxford Brookes University","correspondingAuthor":true,"prefix":"","firstName":"Marc","middleName":"","lastName":"Cowling","suffix":""},{"id":584494192,"identity":"169c66b2-9ec4-4181-91b1-7f22d00e886a","order_by":1,"name":"Ciarán Mac an Bhaird","email":"","orcid":"","institution":"Dublin City University","correspondingAuthor":false,"prefix":"","firstName":"Ciarán","middleName":"Mac an","lastName":"Bhaird","suffix":""},{"id":584494193,"identity":"a3f60a80-dc9d-4b2a-a2ab-ec2be439c244","order_by":2,"name":"Seán O'Reilly","email":"","orcid":"","institution":"University College Dublin","correspondingAuthor":false,"prefix":"","firstName":"Seán","middleName":"","lastName":"O'Reilly","suffix":""},{"id":584494194,"identity":"2e61922a-f350-408d-b6e6-4e55d5680dd9","order_by":3,"name":"Huan Yang","email":"","orcid":"","institution":"Oxford Brookes University","correspondingAuthor":false,"prefix":"","firstName":"Huan","middleName":"","lastName":"Yang","suffix":""}],"badges":[],"createdAt":"2026-01-23 12:08:19","currentVersionCode":1,"declarations":"","doi":"10.21203/rs.3.rs-8678997/v1","doiUrl":"https://doi.org/10.21203/rs.3.rs-8678997/v1","draftVersion":[],"editorialEvents":[],"editorialNote":"","failedWorkflow":false,"files":[{"id":101881987,"identity":"f71605ff-bc8c-4a52-972e-5de9bac1ecfc","added_by":"auto","created_at":"2026-02-04 15:17:58","extension":"pdf","order_by":1,"title":"","display":"","copyAsset":false,"role":"manuscript-pdf","size":533589,"visible":true,"origin":"","legend":"","description":"","filename":"ManuscriptFLCT.pdf","url":"https://assets-eu.researchsquare.com/files/rs-8678997/v1_covered_b0eb34b8-a971-4103-9706-b199622a5cb9.pdf"}],"financialInterests":"No competing interests reported.","formattedTitle":"Does Berger and Udell (1998) Financial Life-Cycle Theory Hold for Loan Interest Rates?","fulltext":[],"fulltextSource":"","fullText":"","funders":[],"hasAdminPriorityOnWorkflow":false,"hasManuscriptDocX":false,"hasOptedInToPreprint":true,"hasPassedJournalQc":"","hasAnyPriority":false,"hideJournal":true,"highlight":"","institution":"","isAcceptedByJournal":false,"isAuthorSuppliedPdf":true,"isDeskRejected":"","isHiddenFromSearch":false,"isInQc":false,"isInWorkflow":false,"isPdf":true,"isPdfUpToDate":true,"isWithdrawnOrRetracted":false,"journal":{"display":true,"email":"[email protected]","identity":"researchsquare","isNatureJournal":false,"hasQc":true,"allowDirectSubmit":true,"externalIdentity":"","sideBox":"","snPcode":"","submissionUrl":"/submission","title":"Research Square","twitterHandle":"researchsquare","acdcEnabled":true,"dfaEnabled":false,"editorialSystem":"","reportingPortfolio":"","inReviewEnabled":false,"inReviewRevisionsEnabled":true},"keywords":"Bank Loans, Firm Size, Firm Age, Interest Rates, Financial Life-Cycle Theory, SMEs","lastPublishedDoi":"10.21203/rs.3.rs-8678997/v1","lastPublishedDoiUrl":"https://doi.org/10.21203/rs.3.rs-8678997/v1","license":{"name":"CC BY 4.0","url":"https://creativecommons.org/licenses/by/4.0/"},"manuscriptAbstract":"\u003cp\u003eFinancial 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. But 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 average interest rates 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. 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