The effect of banking relationships on the future of financially distressed firms |
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| Affiliation: | 1. Department of Finance, Auburn University, 303 College of Business, Auburn, AL 36849, United States;2. Department of Finance, Bentley University, 175 Forest St., Waltham, MA 02452, United States;3. Ally Financial, 440 S. Church St., Charlotte, NC 28202, United States;1. DG Macro-Prudential Policy & Financial Stability, Financial Stability Surveillance, European Central Bank, Germany;2. DG Research, Monetary Policy Research Division, European Central Bank, 60640 Frankfurt am Main, Germany;1. College of Business, Florida State University, United States;2. Implied Capital Advisors, United States |
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| Abstract: | In this study I empirically examine U.S. publicly traded firms to determine the impact of banking relationships on the future of financially distressed firms. Results demonstrate that obtaining a relationship-backed loan in the six months prior to distress identification significantly increases the probability of future firm emergence from distress. However, this effect decreases as the severity of firm distress increases. These results are robust to variations in banking relationship measures and to addressing endogeneity. This study provides evidence consistent with the value of lending relationships stemming from the ease of transmission of “soft” information within the lender's organization. |
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