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Bank Monitoring in Construction Lending

Using a proprietary database of nearly 30,000 non-syndicated multiple-draw construction loans, we empirically verify the predictions of a vast body of seminal theoretical models on monitoring that have been largely untested. We find evidence that banks trade off monitoring with more favorable loan origination terms and that monitoring is also less frequent on loans where the bank has a prior relationship, suggesting that banks may be transferring information across projects. Furthermore, we show that negative on-site inspection reports are associated with a greater likelihood of banks denying draw requests, indicating that the information that banks collect during the monitoring process is important to their decision-making. Using draw schedules to instrument for monitoring intensity, we show that a one standard deviation increase in bank monitoring is associated with a 5.59 percentage point decrease in the probability of loan default. and day fixed with a quarter-property zipcode fixed effect, and the results are generally unchanged.