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

Published online by Cambridge University Press:  24 February 2016

Daniel Carvalho ,
Miguel A. Ferreira  and
Pedro Matos
Daniel Carvalho*
Affiliation:
daniel.carvalho@marshall.usc.edu, University of Southern California, Marshall School of Business, Los Angeles, CA 90089
Miguel A. Ferreira
Affiliation:
miguel.ferreira@novasbe.pt, Universidade Nova de Lisboa, Nova School of Business and Economics, Lisboa 1099-032, Portugal
Pedro Matos
Affiliation:
matosp@darden.virginia.edu, University of Virginia, Darden School of Business, Charlottesville, VA 22906.
*
*Corresponding author: daniel.carvalho@marshall.usc.edu
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Abstract

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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.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 50 , Issue 6 , December 2015 , pp. 1165 - 1197
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2016 

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