Bank Lending Relationships Research Articles

A new look into the prevalence of balance sheet or competitiveness effect of exchange rate depreciation in a highly euroised economy

This article empirically tests the impact of exchange rate depreciation on sectoral performance proxied by investment or, alternatively, sales. It measures the balance sheet and the competitiveness effect in a country that records very high levels of liability euroisation. Panel data methodology is applied on a dataset of 20 Croatian non-financial sectors combining macroeconomic and sectoral financial information. Results confirm there are strong negative effects of liability euroisation on both investment and sales. Negative balance sheet effects and very small positive competitiveness effects are found as well, adding up to a negative overall exchange rate depreciation effect on sectoral performance. Moreover, we find evidence that the corporate sector does not hedge against exchange rate exposure and that the domestic financial system is a constraining factor for corporate investment growth. We also find evidence of size asymmetries related to bank lending relationships.

Bank lending relationships and the use of performance-sensitive debt

We show that performance-sensitive debt (PSD) is used to reduce hold-up problems in repeated lending relationships. Using a large sample of bank loans, we find a more frequent use of PSD if hold-up is more likely, e.g. if a longterm lending relationship exists and the borrower has fewer outside financing alternatives. The use of PSD is less likely in syndicated relationship loans, as hold-up is less important in this market. Finally, we find a substitution effect between the use of PSD and the tightness of financial covenants, which is consistent with PSD reducing hold-up problems caused by the use of covenants.

Market Liquidity and Bank-Dominated Corporate Governance: Evidence from Japan

This paper investigates the relationship between market liquidity and bank-dominated corporate governance structure of Japanese listed firms, represented as main bank relationships and cross shareholdings. Using the data of bank-dominated corporate governance mechanisms like Japan, we empirically investigate the relationship of corporate governance and market liquidity and asymmetric information degree in the Tokyo Stock Exchange, known as the representative stock market of Japan. In addition, we also focus on the recent Japanese corporate governance change of increase of foreign shareholdings. We find that (1) main bank lending relationships increase market liquidity and reduce asymmetric information in financial markets and (2) foreign shareholdings are more positively related to market liquidity and more negatively correlated with asymmetric information in financial markets. This suggests that the bank monitoring mechanisms would take a substitute information production role for block holder monitoring role in the market-oriented corporate governance countries like US.

Bank Lending Relationships and the Use of Performance-Sensitive Debt

Bank Lending Relationships and the Use of Performance-Sensitive Debt

Using Bank Mergers and Acquisitions to Understand Lending Relationships

We study how firm-bank lending relationships affect firms' access to and terms of credit. We use bank mergers and acquisitions (M&As) as exogenous events that affect lending relationships. Bank M&As lead to organisational changes at the involved banks, which may reduce the amount of soft information encompassed in the firm-bank relationship. Using a unique Norwegian dataset, which combines information on companies' bank accounts, annual accounts, bankruptcies, and bank M&As for the years 1997-2009, we find that domestic bank mergers increase interest rate margins by 0.24 percentage points for opaque small and medium sized firms, relative to less opaque firms. Since, due to information asymmetries, opaque firms are typically more dependent on bank lending relationships, our results indicate that these relationships are advantageous for such borrowers, and the destruction of a relationship during the merger process has adverse effects for the firm. Conversely, the results are not consistent with a lock-in effect due to an information monopoly by the relationship lender that on average increases a firm's borrowing costs over its life cycle. The results are robust to the inclusion of variables that control for effects of market competition.

Reorganisation resolutions and bank lending relationships in Taiwan

This paper investigates the impact of three different types of final resolutions of a reorganisation plan – reorganisation ratification, out-of-court settlement, and filing dismissal – on the filer's lead lending bank (LLB), on which earlier research is completely silent. Results reveal that LLBs have the largest (least) negative stock returns in response to the announcement of filing dismissal (reorganisation ratification). Moreover, this paper is the first to explore the extent to which the loan-, bank-, and borrower-level variables lead to a predictable valuation effect for the filer's LLB. In addition to contributing to the literature on bank–borrower relationships, this study proposes an innovative application by providing an empirical exposition of the receiver operating characteristic curve analysis and, thus, demonstrates the models' performance in reliability and robustness.

Do bank lending relationships always enhance financial distress resolution? The case of Germany

This article examines the financial distress resolution benefit of bank lending relationships in a system where because of the lack of access to public debt and equity markets, banks do not face competition as providers of capital. For a sample of German firms, this article finds that companies in financial distress are more likely to be liquidated if they have high amounts of bank debt. Furthermore, companies that are saved show higher potential for financial distress a year prior to bankruptcy. This suggests that certain aspects of value of bank lending relationships are dependent on the financial system in which they occur.

The Survival of Start-Ups: Do Their Funding Choices and Bank Relationships at Birth Matter?

In this paper we seek evidence for the theory that start-ups' founding choices imprint them, affecting their chances of survival for a long period of time. Based on a unique dataset of Portuguese start-ups, we find that larger start-ups and start-ups with less leverage are more likely to survive for longer periods of time. The same is true of start-ups that opt for maintaining a unique bank-lending relationship and those that have a bank among their shareholders. Lending relationships with state-owned banks do not affect these firms' chances of survival. Our investigation into the effects of start-ups' founding choices of these variables shows that their founding size and leverage as well as the mix of funding sources that they choose at birth affect their chances of survival for several years. Importantly, the future effects of some of these choices do not decay as firms age, providing, therefore, support to the theory that start-ups' founding choices imprint them.

MULTIPLE BANKING RELATIONSHIPS AND OVER‐LEVERAGE IN ITALIAN MANUFACTURING FIRMS

The purpose of this paper is to shed more light on the determinants of the number of bank lending relationships. In particular we look at the link between over‐leverage and the number of banking relationships for a sample of Italian manufacturing firms, distinguishing between firms with a main bank and firms without a main bank. The main result of the paper is that the number of banking relationships increases with over‐leverage only for firms without a main bank. We argue that this result is consistent with the view that, when banks perform transaction lending, firms can increase their debt capacity by increasing the number of creditors, promising ex ante up to the full amount of available assets to each one of the creditors.

Do Bank Loan Relationships Still Matter?

James (1987) and Lummer and McConnell (1989) find that during the 1970s and 1980s the market responded positively to announcements of bank lending agreements. However, many of the advantages associated with bank lending relationships have largely disappeared since the 1980s due to financial system changes and greater availability of and less costly financial information. We find that bank loan announcements produced positive abnormal returns in the 1980s, but by the latter part of our sample period those announcement returns disappear entirely. We do find that bank loan relationships may still be valuable to smaller, poorer performing firms or during periods of high credit risk spreads.

Switching from Single to Multiple Bank Lending Relationships: Determinants and Implications

Our results show that the majority of firms borrow for the first time from a single bank, but soon afterwards some of them start borrowing from several banks. Duration analysis shows that the likelihood of a firm substituting a single with multiple relationships increases with the duration of the single relationship and that firms with more growth opportunities and more bank debt are more likely to initiate multiple relationships. Firms with poor performance, too, are more likely to initiate multiple relationships. The analysis of the ex post effects of the initiation of multiple relationships does not detect an increase in the firm's overall indebtedness and investment, but it finds an increase in its trade credit reliance and no improvement in its performance. Overall these results suggest to us that a potential unwillingness by the incumbent bank to increase its exposure to a firm because of its past poor performance appears to explain better firms' decision to initiate multiple relationships than the hypothesis that they do so to protect themselves against the hold-up rents inherent to exclusive relationships because they have many growth opportunities.

SMES and Bank Lending Relationships: The Impact of Mergers

This paper studies the impact of bank mergers on firm-bank lending relationships using information from individual loan contracts in Belgium. We analyse the effects of bank mergers on the probability of borrowers maintaining their lending relationships and on their ability to continue tapping bank credit. The Belgian financial environment reflects a number of interesting features: high banking sector concentration; “in-market” mergers with large target banks; importance of large banks in providing external finance to SMEs; and low numbers of bank lending relationships maintained by SMEs. We find that bank mergers generate short-term and longer-term effects on borrowers' probability of losing a lending relationship. Mergers also have heterogeneous impacts across borrower types, including borrowers of acquiring and target banks, borrowers of differing size, and borrowers with single versus multiple relationships. Firms borrowing from acquiring banks are less likely to lose their lending relationship, while target bank borrowers are more likely to lose their relationship. Overlap borrowers – borrowing from two of the merging banks – are less likely to lose their relationship than firms borrowing from only one of the merging banks or firms borrowing from nonmerging banks.

Do Bank Lending Relationships Always Enhance Financial Distress Resolution? The Case of Germany
 

This paper looks at the financial distress resolution benefit of bank lending relationships in a system where due to the lack of access to public debt and equity markets banks do not face competition as providers of capital. For a sample of German firms this paper finds that companies in financial distress are more likely to be liquidated if they have high amounts of bank debt. Furthermore, companies that are saved show higher potential for financial distress a year prior to bankruptcy. This suggests that certain aspects of value of bank lending relationships are dependent upon the financial system in which they occur. In addition, the nature of the financial system seems to influence the economic efficiency of the bankruptcy process.

Financial Distress and Bank Lending Relationships

We use a unique data set of bank loans to examine the wealth effects on lead lending banks when their borrowers suffer financial distress. We find a significant negative announcement return for the lead lending bank when a major corporate borrower announces default or bankruptcy. Banks with higher exposure to the distressed firm have larger negative announcement‐period returns. The existence of a past lending relationship with the distressed firm results in larger wealth declines for the bank shareholders. Finally, financial distress also has a significant negative effect on borrower's returns.

Switching from Single to Multiple Bank Lending Relationships: Determinants and Implications

Our data show that nearly all firms borrow for the first time in their life from a single bank, but soon afterward some of them start borrowing from additional banks. Duration analysis shows that the likelihood of a firm substituting a single relationship with multiple relationships increases with the duration of that relationship. It also shows that this substitution is more likely to occur for firms with more growth opportunities and for firms with poor performance. The analysis of the ex post effects of the initiation of multiple relationships, in turn, shows that firms with higher levels of investment prior to the initiation of multiple relationships increase their investment even further when they start to borrow from multiple banks and that firms with poor prior performance continue to perform poorly afterward. These results suggest that concerns with hold-up costs, together with an unwillingness by the incumbent bank to increase its exposure to a firm because of its past poor performance, are the key reasons for these firms to initiate an additional relationship this early in their life. Journal of Economic Literature Classification Numbers: G21, G32.

Debt underwriting by commercial bank-affiliated firms and investment banks: More evidence

We compare underwriting performance by commercial bank-affiliated firms (Section 20s) and traditional investment banks over the period 1995–1998. We find that gross spreads are lower in the case of Section 20 underwritings, but that yield spreads are not. Our sample includes a substantial number of observations following changes in Federal Reserve policies that substantially eased restrictions on Section 20 activities in early 1997. Our findings differ somewhat from results in the literature that focused on periods prior to these policy changes. We find, for example, no evidence that a prior commercial bank lending relationship influences underwriting yields for any type of issue. Our results also fail to confirm earlier evidence that collective Section 20 underwritings produce a favorable competitive effect on gross spreads and yield spreads. We find substantial evidence that both the underwriting mix and the underwriting process are relevant to the behavior of gross spreads and yield spreads over the sample period.

The Effect of Credit Scoring on Small-Business Lending

This paper examines the effect of credit scoring on small-business lending for a sample of large U. S. banking organizations. We find that credit scoring is associated with an 8.4 percent increase in the portfolio share of small-business loans, or $4 billion per institution. However, we fail to uncover any specific attributes of bank small-business credit-scoring programs that lead to this increased lending. Overall, we conclude that credit scoring lowers information costs between borrowers and lenders, thereby reducing the value of traditional, local bank lending relationships.

Small Firm Lending Contracts: Do Banks Differentiate between Firms?

This paper examines the role of interest rates and securities within the context of the small firm - bank lending relationship and questions whether banks alter their lending conditions on the basis of specific firm characteristics and the nature of the borrowing undertaken. The results suggest that the imposition of full collateralization reduces the role of interest rates considerably, although there is evidence of banks exercising their market power in more costly lending of the smallest of firms.