The Impact of Bank Lending Relationships on Mergers and Acquisitions

Abstract

Information is particularly hard to obtain, but extremely valuable in the course of major corporate events such as acquisitions. As informed lenders, relationship banks are found to play a certification role in acquisitions. The greater the intensity of a prior bank lending relationship, the greater the probability that a firm will initiate and complete acquisitions. Conditional on those completed acquisitions, prior bank lending relationships are positively associated with the greater use of cash as a method of payment, indicating that studies finding positive abnormal returns for cash-financed acquisitions may contain bank certification effects. Furthermore, the market perceives the monitoring and screening associated with more intense bank lending relationships as certification of value, as evidenced by positive announcement effects.