The costs of lead bank–distressed borrower relationships: evidence from commercial lending in Taiwan

This is the first study to investigate the impact of the adjudication of a borrower's reorganisation filing on the shareholder wealth of the lead bank. The results reveal that the market is acutely sensitive to adverse information and the reorganisation adjudication of a borrower's plan has a detrimental effect on the reputation and wealth of the lead bank. Further, while both are positively associated with wealth effects, the RATE of the loan-level variable is more highly related than the LEVERAGE of the borrower-level variable to wealth loss. Additionally, large lenders experience less wealth loss. The higher the bank debt of a firm, the higher the adverse abnormal returns to the lead bank. Higher collateral and rates on loans are used to compensate for the greater risk of the loan portfolio. Likewise, the market may view lead banks with high loan loss reserves as banks that are not particularly adept at identifying creditworthy borrowers.     

The Impact of Receiving Debtor-in-Possession Financing on the Probability of Successful Emergence and Time Spent Under Chapter 11 Bankruptcy

The ability to obtain financing is a critical element in attempting to successfully reorganise a firm which has declared Chapter 11 bankruptcy. Debtor-in-possession (DIP) financing has become an increasingly popular method in recent years. This paper examines whether receiving DIP financing is related to successful reorganisations and a shortened duration under Chapter 11 bankruptcy proceedings. This study finds that there is an increase in realised returns to equity at the announcement of DIP loan agreements which is positive and statistically significant. It is also found that DIP-financed firms have a reduced probability of liquidation, and shorter time spent under bankruptcy proceedings.     

An analysis of bank stock price reaction to distressed borrowers: Taiwanese evidence

This paper investigates the impacts of a borrower's reorganisation plan confirmation on its lending bank's shareholder wealth. Earlier empirical research is completely silent on this research area. Using data from a sample of Taiwanese reorganised firms, this paper shows that the market discriminates among lending banks by making inferences based on their exposure to their reorganised borrower; that is, the lead lending banks experience negative wealth effects, whereas the second lending banks experience positive effects. The results also show that wealth effects are negatively related to loan collateral and rates charged on the loans as well as on corporate leverage. In addition, the reliability and robustness of the model are demonstrated by the receiver operating characteristic curves.     

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.