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Lending Relationships and the Effect of Bank Distress: Evidence from the 2007–2009 Financial Crisis

  • Daniel Carvalho (a1), Miguel A. Ferreira (a2) and Pedro Matos (a3)
Abstract

We study the transmission of bank distress to nonfinancial firms from 34 countries during the 2007–2009 financial crisis using systemic and bank-specific shocks. We find that bank distress is associated with equity valuation losses and investment cuts to borrower firms with the strongest lending relationships with banks. The losses are not offset by borrowers’ access to public debt markets and are concentrated in firms with the greatest information asymmetry problems and weakest financial positions. Our findings suggest that public debt markets do not mitigate the effects of relationship bank distress during financial crises.

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Copyright
COPYRIGHT: © Michael G. Foster School of Business, University of Washington 2016 
Corresponding author
*Corresponding author: daniel.carvalho@marshall.usc.edu
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