Date of Degree

5-2015

Document Type

Dissertation

Degree Name

Ph.D.

Program

Business

Advisor

Linda Allen

Keywords

Bank Lending Relationships; Bank Monitoring; Corporate Governance; Earnings Announcements; Information Asymmetry; Mergers and Acquisitions

Abstract

This dissertation consists of three chapters addressing the impact of bank lending relationships on three borrowing firms' corporate and investment decisions: mergers and acquisition, board structure, and the timing of earnings announcements.

In the first chapter, I investigate the impact of prior bank lending relationships on borrowing firms' acquisition decision. Information is particularly hard to obtain, but extremely valuable in the course of major corporate events such as acquisitions. As informed lenders, relationship banks are found to play a certification role in acquisitions. The greater the intensity of a prior bank lending relationship, the greater the probability that a firm will initiate and complete acquisitions. Conditional on those completed acquisitions, prior lending relationships are positively associated with the greater use of cash as a method of payment, indicating that studies finding positive abnormal returns for cash-financed acquisitions may contain bank certification effects. Furthermore, the market perceives the monitoring and screening associated with more intense bank lending relationships as certification of value, as evidenced by positive announcement effects, particularly for private target firms.

The second chapter studies the relation between bank lending relationships and borrowing firms' board structure. As delegated monitors, banks are granted various legal and contractual powers to monitor and intervene in the borrowing firms' daily operations, thereby acting in conjunction with other corporate governance mechanisms. Bank monitoring is costly, however, in terms of the cost of financing and potential hold-up problems. After controlling for endogeneity, I find that the presence of lending relationships increases board size and reduces the percentage of insider directors, resulting in a negative impact on the firm value (Tobin's Q). Controlling for the presence of a bank lending relationship may resolve an ongoing debate regarding the role of inside directors in creating firm value. I also find the costs outweigh the monitoring benefits and certification services provided by bank lenders.

In the third chapter, I examine the role of bank monitoring in the timing of earnings announcements. Managers have been shown to procrastinate and delay the public release of bad news on earnings. I find that banks discipline and prevent such managerial procrastination of earnings disclosures to the public. Moreover, I find that the market is more tolerant of delays in the public release of earnings information in the presence of a bank lending relationship. Thus, the negative abnormal return accompanying late releases of earnings information is observed only when a bank lending relationship is not present.

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