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Relationship Bank Behavior during Borrower Distress

Published online by Cambridge University Press:  19 September 2018

Yan Li ,
Ruichang Lu Open the ORCID record for Ruichang Lu [Opens in a new window]  and
Anand Srinivasan Open the ORCID record for Anand Srinivasan [Opens in a new window]
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Abstract

This article provides a comprehensive examination of the time-series behavior of relationship banks around and during borrower distress. Relationship and outside loans have similar interest rates during distress and even 2 years prior to distress. Relative to outside loans in distress, relationship loans in distress have lower maturity. The fraction of bank lending given by relationship banks reduces during borrower distress. Overall, borrowers in distress do not derive benefits from relationship banks. These findings are inconsistent with models that suggest banks have an implicit commitment to help their borrowers in distress due to reputation concerns.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 54 , Issue 3 , June 2019 , pp. 1231 - 1262
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

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Footnotes

1

We thank Hendrik Bessembinder (the editor) and an anonymous referee for detailed comments that greatly improved this article. We also thank seminar participants and discussants at the 2009 Centre for Economic Policy Research and the European Banking Center and the University of Antwerp (CEPR-EBC-UA) Conference on Competition in Banking Markets, the 2010 Asian Finance Association International Conference, the 2010 annual meeting of the European Finance Association, the 2010 Financial Intermediation Research Society (FIRS) Finance Conference, the 2010 Annual Meeting of the Financial Management Association, the 2010 Annual Meeting of the Western Finance Association, Korea University, Massey University, the National University of Singapore, Korea Advanced Institute of Science and Technology (KAIST) Business School, Sungkyunkwan University, and Xiamen University. We also thank Yakov Amihud, Miao Bin, Edmund Cheung, Sandeep Dahiya, Allaudeen Hameed, and Srinivasan Sankaraguruswamy for their comments. This article is based partially on Li’s doctoral dissertation titled “Lending Relationships and Distressed Firms,” submitted to the National University of Singapore (NUS). Srinivasan thanks NUS Faculty Research Grants R-315-000-066-112 and R-315-000-066-133 for financial support for this project.

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