Relationship Bank Behavior During Borrower Distress and Bankruptcy

Li, Yan; Lu, Ruichang; Srinivasan, Anand

doi:10.2139/ssrn.1773069

Cited by 6 publications

(5 citation statements)

References 12 publications

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“…Prepetition lenders play a significant role in providing DIP financing in recent years (Dahiya, John, Puri, and Ramirez (2003)). Their reasons for making such loans range from enforcing governance and the priority of their prepetition loans-the rollup provision (Skeel (2003))-to continuing prior lending relationship (Li and Srinivasan (2011)). 21 More than three quarters of the DIP financing is provided by prepetition lenders in our sample.…”

Section: Determinants Of Ceo Turnovermentioning

confidence: 99%

How Costly is Corporate Bankruptcy for Top Executives?

2012

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We provide large-sample estimates of CEO personal bankruptcy costs that, for the first time, account for the CEO's post-bankruptcy employment income. We track CEO employment changes using 342 U.S. public companies filing for Chapter 11 between 1995 and 2008. Surprisingly, one-half of the incumbent CEOs maintain full-time employment-in sharp contrasts with the zero reemployment rate traditionally assumed in the literature. Two-thirds are hired by a new company, and several continue as top executives. Also surprising, the median total compensation change from the new employment is close to zero, suggesting that the CEO is not "tainted" by the bankruptcy event. The other half of the incumbent CEOs, who do not maintain full-time employment, experience an income loss with a median present value of $4 million (discounted until retirement age). This implies an ex ante expected median personal bankruptcy cost of $2 million (in constant 2009 dollars). We also provide some first evidence on how creditor activism, in particular through debtor-in-possession (DIP) financing, affects expected CEO personal bankruptcy costs.

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Section: Determinants Of Ceo Turnovermentioning

confidence: 99%

How Costly is Corporate Bankruptcy for Top Executives?

2012

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“…On the other hand, the insignificant coefficient on Relationship Bank indicates that maintaining a prior business relationship has no impact on the oneyear-ahead likelihood of bankruptcy. This result is similar to that reported in Li and Srinivasan (2011).…”

Section: Social Network During Industry Distresssupporting

confidence: 93%

“…Reasons for delisting include bankruptcy, insufficient capital, low stock price, and failure to make SEC and/or exchange-required filings in a timely manner, among others. 16 The ratio of firms with relationship banks is very comparable to Li and Srinivasan (2011).…”

Section: Data For Firm Distress Analysismentioning

confidence: 97%

“…International evidence suggests that related banks reduce the cost of distress (Hoshi, Kashyap, and Scharfstein, 1990;Elsas and Krahnen, 1998;Peek and Rosengren, 2005;Charumilind, Kali, and Wiwattanakantang, 2006). However, Li and Srinivasan (2011), using data from the U.S., find that although relationship banks offer preferential terms to their borrowers (e.g., prior to distress and after bankruptcy filing), they do not appear to assist their borrowers in staving off distress or bankruptcy. In contrast, my results show that personal connections with lenders benefit firms in distress.…”

Section: Introductionmentioning

confidence: 96%

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Essays in empirical corporate finance

Huang¹

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This thesis studies a range of topics in empirical corporate finance, and consists of three essays. The first essay is sole-authored and is titled 'The Value of Social Networks during Periods of Distress.' The second essay 'The Role of Investment Banker Directors in M&A: Can Experts Help?' is a joint work with Feng Jiang, Erik Lie, and Ke Yang. The third essay is titled 'Acquisitions of Financially Distressed Firms: An Empirical Analysis' and is coauthored with Feng Jiang. In the first essay, I examine the impact of social networks during (i) a financial crisis, (ii) industry downturns, and (iii) periods when firms are in financial distress. I find that socially well-connected firms exhibit better performance during the financial crisis of 2007-2009. Well-connected firms have better access to debt financing during the crisis, and this is especially true among financially constrained firms. During industry downturns, firms with more social connections also perform better. When firms become severely financially distressed, I find that personal connections to lenders reduce the probability of filing for bankruptcy and increase the likelihood of getting Debtor-in-Possession financing if they nevertheless have to file. Overall, the results suggest that social networks benefit firms in times of distress. In the second essay, we examine how directors with investment banking experience affect firms' acquisition behavior. We find that firms have a higher probability of acquisition when an investment banker is a director. Furthermore, acquirers with investment banker directors on the board have significantly higher announcement returns, especially if the deal is relatively large and the bankers' experience and/or network is current. We also find evidence that investment banker directors help reduce the takeover premium and advisory fees paid to outside consultants. Finally, the presence of investment banker directors is positively related to long-run operating and stock performance. Lastly, in the third essay, we study acquisitions of distressed targets. We find distressed acquisitions are usually associated with debt restructuring of the target debt, and the deals can be implemented with or without the aid of the bankruptcy court. We find target stakeholders generally prefer to complete the acquisition without court help, unless the hold-out problem that resides in debt structures would jeopardize a deal outside of Chapter 11. Firms that choose to be acquired within Chapter 11 are found to have more debt contracts outstanding and more public debt. We also find that target CEOs are more likely to retain their jobs following non-bankruptcy acquisitions or prenegotiated acquisitions than in post-negotiated acquisitions, consistent with our conjecture that management benefits personally from arranging a sale as a resolution to the financial distress of the firm.

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“…On the one hand, large strands of literature argue that relationships should benefit borrowers in distress, either because of information friction mitigation (Sharpe, 1990;Diamond, 1991), or implicit contracting incentives (Serdar Dinç, 2000). On the other hand, increased likelihood of bankruptcy may also lead to a reduction of the benefits of relationship lending as the relationship bank sees little benefit in continuing relationship in future due to lower likelihood of business from the same borrower (Bharath et al, 2007;Li and Srinivasan, 2017). My finding of lenience in delinquency relates to the first view.…”

Section: Related Literaturementioning

confidence: 80%

Big Broad Banks: How Does Cross-Selling Affect Lending?

2017

SSRN Journal

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Using unique micro-data that contain the internal information on all corporate customers of a large Nordic bank, I show that combining loan and non-loan products (cross-selling) has two benefits. First, it increases credit supply, especially in recessions. Second, it increases the likelihood of receiving lenient treatment in delinquency. I argue that non-loan relationships play an important role in determining credit supply and debt renegotiation, not only by (i) mitigating information asymmetries (as suggested in earlier literature), but also by (ii) increasing the profitability of the relationship. Exploiting an exogenous and differential change in similar products' profitability due to the Basel II implementation, I estimate the causal effect of this new profit channel on credit supply. A 20 percent decrease in non-loan products' profitability (i) reduces credit supply to affected firms by 13 percent (600,000 USD) compared with unaffected firms, and (2) reduces likelihood of receiving lenient treatment for affected firms by 30 percent (13 pp) compared with unaffected firms, conditional on being delinquent.

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Relationship Bank Behavior During Borrower Distress and Bankruptcy

Cited by 6 publications

References 12 publications

How Costly is Corporate Bankruptcy for Top Executives?

How Costly is Corporate Bankruptcy for Top Executives?

Essays in empirical corporate finance

Big Broad Banks: How Does Cross-Selling Affect Lending?

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