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Financial Distress and Bank Lending Relationships

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  • Sandeep Dahiya
  • Anthony Saunders
  • Anand Srinivasan

Abstract

We use a unique data set of bank loans to examine the wealth effects on lead lending banks when their borrowers suffer financial distress. We find a significant negative announcement return for the lead lending bank when a major corporate borrower announces default or bankruptcy. Banks with higher exposure to the distressed firm have larger negative announcement‐period returns. The existence of a past lending relationship with the distressed firm results in larger wealth declines for the bank shareholders. Finally, financial distress also has a significant negative effect on borrower's returns.

Suggested Citation

  • Sandeep Dahiya & Anthony Saunders & Anand Srinivasan, 2003. "Financial Distress and Bank Lending Relationships," Journal of Finance, American Finance Association, vol. 58(1), pages 375-399, February.
    • Handle: RePEc:bla:jfinan:v:58:y:2003:i:1:p:375-399
    DOI: 10.1111/1540-6261.00528
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