IDEAS home Printed from https://ideas.repec.org/a/wly/revfec/v38y2020i2p332-351.html
   My bibliography  Save this article

Bank lending to targets of active takeover attempts: The simultaneous choice of loan maturity, pricing, and security

Author

Listed:
  • Justin Lallemand

Abstract

I investigate bank loans to takeover targets considering the simultaneous decision of pricing, maturity, collateral, and covenants applying Generalized Method of Moments (GMM). Results are largely in line with the Agency Theory of Covenants (ATC) as pricing for new bank debt is lower given greater collateral and covenant protection, consistent with existing literature on public debt. However, poor performing targets demonstrate a positive relationship between pricing and covenants while bank loans to high performers are consistent with ATC predictions. Finally, loan terms tied to ex post observations of merger outcomes suggest banks possess some knowledge of merger outcomes in advance.

Suggested Citation

  • Justin Lallemand, 2020. "Bank lending to targets of active takeover attempts: The simultaneous choice of loan maturity, pricing, and security," Review of Financial Economics, John Wiley & Sons, vol. 38(2), pages 332-351, April.
    • Handle: RePEc:wly:revfec:v:38:y:2020:i:2:p:332-351
    DOI: 10.1002/rfe.1075
    as

    Download full text from publisher

    File URL: https://doi.org/10.1002/rfe.1075
    Download Restriction: no
    File URL: https://libkey.io/10.1002/rfe.1075?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Kai-Shi Chuang, 2017. "The role of investment banks on the impact of firm performance in mergers and acquisitions: evidence from the Asia-Pacific market," Review of Quantitative Finance and Accounting, Springer, vol. 48(3), pages 677-699, April.
    2. Stulz, ReneM., 1988. "Managerial control of voting rights : Financing policies and the market for corporate control," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 25-54, January.
    3. Wenjing Ouyang & Samuel H. Szewczyk, 2018. "Stock price informativeness on the sensitivity of strategic M&A investment to Q," Review of Quantitative Finance and Accounting, Springer, vol. 50(3), pages 745-774, April.
    4. Barclay, Michael J. & Marx, Leslie M. & Smith, Clifford Jr., 2003. "The joint determination of leverage and maturity," Journal of Corporate Finance, Elsevier, vol. 9(2), pages 149-167, March.
    5. Yasser Alhenawi & Martha Stilwell, 2017. "Value creation and the probability of success in merger and acquisition transactions," Review of Quantitative Finance and Accounting, Springer, vol. 49(4), pages 1041-1085, November.
    6. Tatsuo Ushijima, 2016. "Diversification, Organization, and Value of the Firm," Financial Management, Financial Management Association International, vol. 45(2), pages 467-499, May.
    7. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    8. Paul Gompers & Joy Ishii & Andrew Metrick, 2003. "Corporate Governance and Equity Prices," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(1), pages 107-156.
    9. Chemmanur, Thomas J & Fulghieri, Paolo, 1994. "Reputation, Renegotiation, and the Choice between Bank Loans and Publicly Traded Debt," The Review of Financial Studies, Society for Financial Studies, vol. 7(3), pages 475-506.
    10. Walter Novaes, 2003. "Capital Structure Choice When Managers Are in Control: Entrenchment versus Efficiency," The Journal of Business, University of Chicago Press, vol. 76(1), pages 49-82, January.
    11. Rajan, Raghuram G & Zingales, Luigi, 1995. "What Do We Know about Capital Structure? Some Evidence from International Data," Journal of Finance, American Finance Association, vol. 50(5), pages 1421-1460, December.
    12. John E. Core & Wayne R. Guay & Tjomme O. Rusticus, 2006. "Does Weak Governance Cause Weak Stock Returns? An Examination of Firm Operating Performance and Investors' Expectations," Journal of Finance, American Finance Association, vol. 61(2), pages 655-687, April.
    13. Goyal, Vidhan K., 2005. "Market discipline of bank risk: Evidence from subordinated debt contracts," Journal of Financial Intermediation, Elsevier, vol. 14(3), pages 318-350, July.
    14. Jandik, Tomas & Lallemand, Justin, 2014. "Value impact of debt issuances by targets of withdrawn takeovers," Journal of Corporate Finance, Elsevier, vol. 29(C), pages 475-494.
    15. Matthew T. Billett & Tao‐Hsien Dolly King & David C. Mauer, 2007. "Growth Opportunities and the Choice of Leverage, Debt Maturity, and Covenants," Journal of Finance, American Finance Association, vol. 62(2), pages 697-730, April.
    16. Barclay, Michael J & Smith, Clifford W, Jr, 1995. "The Maturity Structure of Corporate Debt," Journal of Finance, American Finance Association, vol. 50(2), pages 609-631, June.
    17. Sudheer Chava & Praveen Kumar & Arthur Warga, 2010. "Managerial Agency and Bond Covenants," The Review of Financial Studies, Society for Financial Studies, vol. 23(3), pages 1120-1148, March.
    18. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
    19. Billett, Matthew T, 1996. "Targeting Capital Structure: The Relationship between Risky Debt and the Firm's Likelihood of Being Acquired," The Journal of Business, University of Chicago Press, vol. 69(2), pages 173-192, April.
    20. Diamond, Douglas W, 1991. "Monitoring and Reputation: The Choice between Bank Loans and Directly Placed Debt," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 689-721, August.
    21. Israel, Ronen, 1992. "Capital and Ownership Structures, and the Market for Corporate Control," The Review of Financial Studies, Society for Financial Studies, vol. 5(2), pages 181-198.
    22. Ishii, Joy & Xuan, Yuhai, 2014. "Acquirer-target social ties and merger outcomes," Journal of Financial Economics, Elsevier, vol. 112(3), pages 344-363.
    23. Ali Nejadmalayeri & Subramanian Rama Iyer & Manohar Singh, 2017. "Is there an optimally diversified conglomerate? Gleaning answers from capital markets," Review of Quantitative Finance and Accounting, Springer, vol. 49(1), pages 117-158, July.
    24. Tomas Jandik & Justin Lallemand, 2017. "Do Capital Structure Adjustments by Takeover Targets Influence Acquisition Gains?," The Financial Review, Eastern Finance Association, vol. 52(2), pages 171-198, May.
    25. Lang, Larry H. P. & Stulz, ReneM. & Walkling, Ralph A., 1989. "Managerial performance, Tobin's Q, and the gains from successful tender offers," Journal of Financial Economics, Elsevier, vol. 24(1), pages 137-154, September.
    26. Kenneth R. Ahern & Jarrad Harford, 2014. "The Importance of Industry Links in Merger Waves," Journal of Finance, American Finance Association, vol. 69(2), pages 527-576, April.
    27. Nicolas Crouzet, 2018. "Aggregate Implications of Corporate Debt Choices," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 85(3), pages 1635-1682.
    28. repec:bla:jfinan:v:43:y:1988:i:2:p:397-412 is not listed on IDEAS
    29. repec:bla:jfinan:v:59:y:2004:i:1:p:107-135 is not listed on IDEAS
    30. Hari P. Adhikari & Thanh T. Nguyen & Ninon K. Sutton, 2018. "The power of control: the acquisition decisions of newly public dual-class firms," Review of Quantitative Finance and Accounting, Springer, vol. 51(1), pages 113-138, July.
    31. Smith, Clifford Jr. & Warner, Jerold B., 1979. "On financial contracting : An analysis of bond covenants," Journal of Financial Economics, Elsevier, vol. 7(2), pages 117-161, June.
    32. Harris, Milton & Raviv, Artur, 1988. "Corporate control contests and capital structure," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 55-86, January.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jandik, Tomas & Lallemand, Justin & McCumber, William, 2017. "The value implications of target debt issuance in withdrawn takeovers: What role do country-specific M&A regulations play?," Journal of Multinational Financial Management, Elsevier, vol. 40(C), pages 14-32.
    2. Jandik, Tomas & Makhija, Anil K., 2005. "The Impact of the Structure of Debt on Target Gains," Working Paper Series 2005-5, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    3. Lin, Steve & Sawani, Assma & Wang, Changjiang, 2023. "Managerial stock ownership, debt covenants, and the cost of debt," Pacific-Basin Finance Journal, Elsevier, vol. 77(C).
    4. Jandik, Tomas & Lallemand, Justin, 2014. "Value impact of debt issuances by targets of withdrawn takeovers," Journal of Corporate Finance, Elsevier, vol. 29(C), pages 475-494.
    5. Bazzana, Flavio & Zadorozhnaya, Anna & Gabriele, Roberto, 2018. "The role of covenants in bond issue. The case of Russian companies," Emerging Markets Review, Elsevier, vol. 36(C), pages 1-18.
    6. Daniel Tut, 2022. "Debt dynamic, debt dispersion and corporate governance," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 19(4), pages 744-771, July.
    7. Jandik, Tomas & Makhija, Anil K., 2005. "Debt, debt structure and corporate performance after unsuccessful takeovers: evidence from targets that remain independent," Journal of Corporate Finance, Elsevier, vol. 11(5), pages 882-914, October.
    8. Beatriz Mariano & Josep Tribó Giné, 2015. "Creditor Intervention, Investment, and Growth Opportunities," Journal of Financial Services Research, Springer;Western Finance Association, vol. 47(2), pages 203-228, April.
    9. Drobetz, Wolfgang & Pensa, Pascal & Wöhle, Claudia B., 2004. "Kapitalstrukturtheorie in Theorie und Praxis: Ergebnisse einer Fragebogenuntersuchung," Working papers 2004/09, Faculty of Business and Economics - University of Basel.
    10. Anderson, Ronald W. & Nyborg, Kjell G., 2011. "Financing and corporate growth under repeated moral hazard," Journal of Financial Intermediation, Elsevier, vol. 20(1), pages 1-24, January.
    11. Wiwattanakantang, Yupana, 1999. "An empirical study on the determinants of the capital structure of Thai firms," Pacific-Basin Finance Journal, Elsevier, vol. 7(3-4), pages 371-403, August.
    12. Mário Santos & António Moreira & Elisabete Vieira, 2014. "Ownership concentration, contestability, family firms, and capital structure," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 18(4), pages 1063-1107, November.
    13. Chy, Mahfuz & Kyung, Hoyoun, 2023. "The effect of bond market transparency on bank loan contracting," Journal of Accounting and Economics, Elsevier, vol. 75(2).
    14. Viet Anh Dang & Edward Lee & Yangke Liu & Cheng Zeng, 2018. "Corporate debt maturity and stock price crash risk," European Financial Management, European Financial Management Association, vol. 24(3), pages 451-484, June.
    15. Tomas Jandik & Anil K. Makhija, 2005. "Leverage and the Complexity of Takeovers," The Financial Review, Eastern Finance Association, vol. 40(1), pages 95-112, February.
    16. Dung T. T. Tran & Hieu V. Phan, 2022. "Government economic policy uncertainty and corporate debt contracting," International Review of Finance, International Review of Finance Ltd., vol. 22(1), pages 169-199, March.
    17. Rizov, Marian, 2008. "Corporate capital structure and how soft budget constraints may affect it," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 22(4), pages 648-684.
    18. Jamie Alcock & Eva Steiner, 2017. "The Interrelationships between REIT Capital Structure and Investment," Abacus, Accounting Foundation, University of Sydney, vol. 53(3), pages 371-394, September.
    19. Reisel, Natalia, 2014. "On the value of restrictive covenants: Empirical investigation of public bond issues," Journal of Corporate Finance, Elsevier, vol. 27(C), pages 251-268.
    20. Brian Akins & David De Angelis & Maclean Gaulin, 2020. "Debt Contracting on Management," Journal of Finance, American Finance Association, vol. 75(4), pages 2095-2137, August.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:revfec:v:38:y:2020:i:2:p:332-351. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://doi.org/10.1002/(ISSN)1873-5924 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.