Banking Relationship, Information Reusability, and Acquisition Loans

Abstract

I study whether and how banks reuse information acquired from one borrower in loans made to different but related borrowers in financing mergers and acquisitions. Specifically, I find that stronger prior lending relationships between acquisition loan lenders and acquisition targets are associated with lower spreads and fewer covenant restrictions of acquisition loans. The results are unlikely to be driven by unobservable acquirer, target, or lender characteristics. Consistent with the information asymmetry hypothesis, the effect is stronger if the degree of information asymmetry of the target firm is higher. I also find that the result is not driven by the coinsurance effect.