Financial Distress and Bank Lending Relationships

Dahiya, Sandeep; Saunders, Anthony; Srinivasan, Anand

doi:10.1111/1540-6261.00528

Cited by 160 publications

(72 citation statements)

References 36 publications

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“…We find that our results are important only among firms with the strongest lending relationships. When we analyze the other side of this relationship, from the viewpoint of banks (Dahiya, Saunders, and Srinivasan (2003)), we find that results are stronger for firms that represent the lowest share of banks' loan portfolios. This provides support that our results are driven by the effect of main bank distress on firms and not the reverse.…”

Section: Figurementioning

confidence: 84%

Lending Relationships and the Effect of Bank Distress: Evidence from the 2007–2009 Financial Crisis

Carvalho¹,

Ferreira²,

Matos³

2015

J. Financ. Quant. Anal.

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We study the transmission of bank distress to nonfinancial firms from 34 countries during the 2007-2009 financial crisis using systemic and bank-specific shocks. We find that bank distress is associated with equity valuation losses and investment cuts to borrower firms with the strongest lending relationships with banks. The losses are not offset by borrowers' access to public debt markets and are concentrated in firms with the greatest information asymmetry problems and weakest financial positions. Our findings suggest that public debt markets do not mitigate the effects of relationship bank distress during financial crises.

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Section: Figurementioning

confidence: 84%

Lending Relationships and the Effect of Bank Distress: Evidence from the 2007–2009 Financial Crisis

Carvalho¹,

Ferreira²,

Matos³

2015

J. Financ. Quant. Anal.

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“…17 Thus, for each loan by borrower i, we look back over a period of 5 years for any previous loans taken by i. 18 Based on the banks retained for these past loans, we construct various relationship measures as discussed below. give full relationship attribution to ABN-AMRO although the loans are syndicated.…”

Section: Market For Bank Loansmentioning

confidence: 99%

“…Thus the responsibilities of a lead bank best fit the description of a relationship lender. 18 We chose the 5 year window as approximately 75% of loan facilities in our sample have maturity less than or equal to 5 years. Thus, most of the borrowers in our sample would need to refinance their debt within 5 years.…”

Section: Market For Bank Loansmentioning

confidence: 99%

So what do I get? The bank's view of lending relationships

Bharath

Dahiya

Saunders

et al. 2007

Journal of Financial Economics

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516

251

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While a number of empirical studies have documented benefits of lending relationships to borrowers (lower loan rates, better credit availability, etc.), not much is known about benefits of such relationships for lenders. For a relationship lender, its comparative advantage in information gathering/processing yields two potential benefits. First, a relationship lender would have a higher probability of selling future information-sensitive products (e.g. loans, security underwriting, etc.) to its borrowers compared to a non-relationship lender. We refer to this as higher volume benefit of relationship lending. Second, if borrower-specific information is only available to relationship lender, it can use this information monopoly to charge higher rates on future loans. We refer to this as increased pricing benefit of relationship lending. Our results show that, on average, a lender with a past relationship with a borrower has a 42% probability of providing it with future loans, while a lender lacking a past relationship with a borrower has only a 3% probability of providing it with a future loan. Consistent with theory, we find that borrowers with greater information asymmetries (e.g. small borrowers, or non-rated borrowers) are significantly more likely to use their relationship banks for future loans. Although the association between past lending relationship and probability of being chosen to provide debt and equity underwriting services in the future is statistically significant, the economic impact is much smaller compared to loan markets. However, our findings do not provide strong support for an increased pricing benefit for relationship lenders. On average, the rate of interest for similar borrowers is 6-10 basis points lower if the loan is provided by a relationship lender. Underwriting fee for initial public offerings (IPO) with relationship lender(s) as lead underwriter(s) is 26 basis points lower. This suggests that lenders are prepared to share some of the benefits of relationship lending with borrowers. * Bharath is with University of Michigan, Dahiya is with Georgetown University, Saunders is with New York University, and Srinivasan is with University of Georgia. Dahiya acknowledges the support of the Lee Higdon, Jr. So What Do I Get? The Bank's View of Lending RelationshipsAbstract While a number of empirical studies have documented benefits of lending relationships to borrowers (lower loan rates, better credit availability, etc.), not much is known about benefits of such relationships for lenders. For a relationship lender, its comparative advantage in information gathering/processing yields two potential benefits. First, a relationship lender would have a higher probability of selling future information-sensitive products (e.g. loans, security underwriting, etc.) to its borrowers compared to a non-relationship lender.We refer to this as higher volume benefit of relationship lending. Second, if borrowerspecific information is only available to relationship lender, it can use this informatio...

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“…17 Use of longer event window has been done in the cases where the event is partially anticipated in Dahiya et al [ 2003].…”

Section: Effects On Airline Share Pricesmentioning

confidence: 99%

Innovation in International Law and Global Finance: Estimating the Financial Impact of the Cape Town Convention

2006

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This paper examines the financial impact of a transfer of legal sovereignty covering the rights to collateral to an international regime in the case of the Cape Town Convention and Protocol covering international mobile assets, specifically commercial aircraft and related equipment, which came into force in 2004. We estimate the impact on financing costs facing airlines based in signatory countries in terms of access to financial markets and interest differentials, debt rating migration and stock prices using rating-sensitivity analysis, OLS regressions and event studies. We find that the present value of the resulting financing cost reductions are very significant and are biased in favor of developing countries, the sources of much of the growth in demand for commercial aircraft going forward. The results suggest the power of changes in the legal framework of financial markets to influence the costs and pricing of global financial flows.

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Financial Distress and Bank Lending Relationships

Cited by 160 publications

References 36 publications

Lending Relationships and the Effect of Bank Distress: Evidence from the 2007–2009 Financial Crisis

Lending Relationships and the Effect of Bank Distress: Evidence from the 2007–2009 Financial Crisis

So what do I get? The bank's view of lending relationships

Innovation in International Law and Global Finance: Estimating the Financial Impact of the Cape Town Convention

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