Abstract
Bank financing reduces information friction and has several other contractual benefits for the borrowing firms. There is also cost to this relationship which is the hold-up problem. With hold-up, banks can charge non-competitive rate to relationship borrowers. Manager-shareholder conflict can also potentially distort the effect of bank financing on firm valuation. I investigate the effect of bank financing on firm valuation represented by Tobin’s Q, with these benefits and costs in mind. Previous studies either look at the announcement effect of loan on firm stock reaction or focus on the effect of relationship lending on various contractual terms, but no one has specifically looked at the impact of bank financing on firm valuation. I find that, in aggregate, bank financing has positive effect on firm valuation. Cross-sectionally, the effect of hold-up cost is more severe for small firms and firms without rating, which are subject to worse form of information asymmetry and which have less access to alternative funding sources.
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