|
Archive@NYU >
Stern School of Business >
Finance Working Papers >
Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/26530
|
| Title: | Financial Distress and Bank Lending Relationships |
| Authors: | Dahiya, Sandeep
Saunders, Anthony
Srinivasan, Anand |
| Keywords: | Financial Distress
Lending Relationships |
| Issue Date: | Oct-2001 |
| Series/Report no.: | FIN-01-001 |
| Abstract: | One of the most important risks faced by a bank is that of loan default
by its borrowers. Existing literature has documented the negative
announcement-period returns for lending banks when a big sovereign
borrower announces a moratorium on its bank loans. In contrast, little
research has been undertaken that analyzes bank shareholder wealth
effects when a major corporate borrower declares default and/or
bankruptcy. This paper uses a unique data set of bank loans to examine
the wealth effects on lead lending banks when their borrowers’
suffer financial distress. For the 10-year period from 1987 to 1996, we
examine a sample of 71 firms that defaulted on their public debt and a
sample of 101 firms that filed for bankruptcy. We find a significant
negative wealth effect for the shareholders of the lead lending banks on
the announcement of bankruptcy and default by the borrowers of their
bank. We also find that the banks with relatively higher exposure to the
distressed firms have larger negative announcement-period returns,
although individual loan details are not public knowledge. Thus, the
market appears to discriminate among lenders in a way not inconsistent
with a correct inference of individual borrower exposures. We also
examine the impact of various loan and bank characteristics on the
magnitude of announcement returns. We find that the existence of a past
lending relationship with the distressed firm results in larger wealth
declines for the bank shareholders. Finally, we find that financial
distress also has a significantly negative effect on borrower’s returns. |
| URI: | http://hdl.handle.net/2451/26530 |
| Appears in Collections: | Finance Working Papers
|
All items in Faculty Digital Archive are protected by copyright, with all rights reserved.
|
