Abstract
In this study I empirically examine U.S. publicly traded firms to determine the impact of banking relationships on the future of financially distressed firms. Results demonstrate that banking relationships significantly increase the probability of future firm emergence from distress when firms obtain loans in the six months prior to distress identification. However, the value of lending relationships decreases as severity of firm distress increases. These results are robust to variations in banking relationship measures and to addressing endogeneity. This study supports that the value of lending relationships stems from the ease of transmission of “soft” information within the lender’s organization.
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