Abstract
Using mergers between firms' existing lenders as shocks to lead-lender monitoring incentives and bargaining power, I find that intensified lender monitoring significantly reduces treated firms' acquisitions. However, lender mergers reduce shareholder-value-enhancing acquisitions as well as value-destroying ones. Deals that do happen create no additional shareholder value and target cash-rich firms with stable incomes. Lender mergers also reduce leverage, sales/earnings volatility, and earnings management. All results are driven by less bank-dependent firms in which lenders are more subject to managerial discretion. The evidence suggests that lender monitoring mitigates managerial agency costs, yet induces behavior that can be over-conservative for shareholders.
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