nach oben

Journal of Financial Services Research

Erschienen in:

11.06.2021

Connected Lending in Bank Lines of Credit

verfasst von: Shu Feng, Chang Liu, Xiaoling Pu

Erschienen in: Journal of Financial Services Research | Ausgabe 2/2022

Einloggen

Aktivieren Sie unsere intelligente Suche, um passende Fachinhalte oder Patente zu finden.

search-config

KI-gestützte Suche

Aus

Abstract

We find that firms usually obtain larger credit lines if their executives have common past employers or past board memberships with lenders. The effect not only exists in the initial amount of credit lines but also the amendment amount during renegotiation. The effect is stronger during the financial crisis and persists after the financial crisis. Having a relationship with banks increases the lines of credit for borrowers with financial constraints or high idiosyncratic risks. More importantly, connected firms obtain larger increases in short-term funding during renegotiation when they have negative credit quality or earnings news. Overall, our findings suggest that asymmetric information is reduced through ties between borrowers and lenders, which significantly improves the short-term funding capacity in the dynamic contract of credit lines.

Vorheriger Artikel Leverage and Risk Taking under Moral Hazard

Nächster Artikel How Much Does Your Banker’s Target-Specific Experience Matter? Evidence from Target IPO Underwriters that Advise Acquirers

Sie haben noch keine Lizenz? Dann Informieren Sie sich jetzt über unsere Produkte:

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

über 67.000 Bücher
über 340 Zeitschriften

aus folgenden Fachgebieten:

Bauwesen + Immobilien
Business IT + Informatik
Finance + Banking
Management + Führung
Marketing + Vertrieb
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

Jetzt informieren

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

über 102.000 Bücher
über 537 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Finance + Banking
Management + Führung
Marketing + Vertrieb
Maschinenbau + Werkstoffe
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

Jetzt informieren

Nur mit Berechtigung zugänglich

A number of papers have examined firms’ usage of credit lines and factors determining lines of credit (Sufi 2009; Yun 2009; Jiménez et al. 2009; Acharya et al. 2013; Acharya et al. 2014).

Although the connection is established based on employment relationships, it is not clear whether the underlying mechanism is based on personal or professional ties between lenders and borrowers. Thus, we do not specifically refer the relationships as professional connections. We thank an anonymous referee for pointing this out.

Chava and Roberts (2008) provide the links between company names in the DealScan and gvkeys in the Compustat.

Roberts (2015) collects 114 random firms based on two considerations: power and cost. The cost refers to the work we need to perform in order to read the SEC 10-K filings and accurately identify each amount renegotiation. Therefore, We have to get a reasonable sample size before we can start hand collection.

Mathers and Giacomini (2016) also mention several concerns regarding the accuracy of Capital IQ’s credit line data.

It’s not guaranteed that the matched facility-years are the origination years of credit facilities because renegotiation may be recorded as a separate observation in DealScan. We follow the criteria of Roberts (2015) to identify origination and renegotiation. If the matched facility-years are the origination years, then we collect credit line data from the origination to the termination years; if the facility-years are not the origination years, we trace back to the origination years and collect the credit line data until termination years.

SEC Electronic Data Gathering, Analysis, and Retrieval (EDGAR) filing system has various phase-in periods for test groups from 1993 till 1995.

We compare our sample with companies in Sufi (2009), and there are no overlapping firms.

Roberts (2015) focuses on the covenant, interest rate spread, and the probability of renegotiations. Ippolito et al. (2019) investigate renegotiations of interest rate spreads and commitment fees following a violation of covenant. We focus on the credit line’s amendment amounts.

We have included two rating dummies (investment grade and speculative grade) in our regressions.

The results are robust and available upon request.

For the two ratios, total credit lines to cash adjusted assets and total credit lines to total assets, connections are positively significant at the 5% level in both the dummy and the logarithmic specifications. The coefficient on the logarithm of connections indicates that a firm would have about 1.6% higher in the ratio of total credit lines to total assets by doubling the number of connections.

Adjusted R² is lower if we use credit line ratios as the dependent variables.

We don’t run regressions of Log(Lead) as the independent variable, since a syndicate loan usually has one lead bank and Log(Lead) does not give us more information than the measure of D(lead).

Connections with lead banks also result in higher credit line ratios. The results are available upon request.

We count a firm having a connection with lead banks as long as it has at least one connection with a lead bank in the origination year.

We don’t report the regression results of control variables to save space, and the full regression results are available upon request.

We can add more matching dimensions and the results are robust. For example, if we add tangibility as a matching variable, the coefficient of D(executive) for model (1) is 0.1413 with a t-value 2.95 which is significant at 1% level. However, adding more matching variables significantly reduces our matched sample size.

We owe a debt of gratitude to Murfin (2012) for sharing the calculation code of covenant strictness.

Results are available upon request.

Connections have significant impacts on the two ratios for firms with higher idiosyncratic risk. The ratio of total credit lines to cash adjusted assets can increase by 4.1% if the companies have connections with banks.

Besides Roberts (2015), Panyagometh and Roberts (2010) use changes of borrowers’ Altman’s Z scores after origination to proxy for bank private information. We think that M/B ratio and profitability ratio are better measures for firms’ credit quality related to revolving bank lines.

The purpose of the matching is to reduce the impact of size on results and to control the magnitude of the changes of measures.

We run the robustness checks to control the financial ratios instead of the changes of the financial ratios and get similar results in terms of the signs and significance of the coefficients. We also add size as another control variable into models, and the coefficient is positively significant at the 1% level, while the signs and significance of the connection measures and the interaction terms do not change.

Murfin (2012) summarizes the most popular financial covenants in the DealScan.

The correlation table is available upon request. For example, the correlation between current ratio and quick ratio is 0.97, so we only include current ratio. The definitions of these financial ratios are listed in A.

Without interaction terms, D(executive) and D(lead) are not significant in the regressions which indicates that percentage changes of total credit lines are generally similar for connected and unconnected facilities, as shown in Table 2. However, the timing of large and small percentage increases are different for connected and unconnected facilities.

The results are available upon request.

We use covenant violation data from Roberts’ website, which covers the period from 1996 to 2012.

Acemoglu D, Johnson S, Kermani A, Kwak J, Mitton T (2016) The value of connections in turbulent times: evidence from the United States. J Financ Econ 121:368–391CrossRef

Acharya V, Almeida H, Campello M (2013) Aggregate risk and the choice between cash and lines of credit. The Journal of Finance 68:2059–2116CrossRef

Acharya V, Almeida H, Ippolito F, Perez-Orive A (2014) Credit lines as monitored liquidity insurance: theory and evidence. J Financ Econ 112:287–319CrossRef

Acharya V, Almeida H, Ippolito F, Perez-Orive A (2018) Credit lines and the liquidity insurance channel. SSRN Scholarly Paper ID 2795794, Social Science Research Network, Rochester, NY

Acharya V, Mora N (2015) A crisis of banks as liquidity providers. The Journal of Finance 70:1–43CrossRef

Acharya V, Philippon T, Richardson M, Roubini N (2009) The financial crisis of 2007-2009: causes and remedies. Financial Markets, Institutions & Instruments 18:89–137CrossRef

Adams RB, Hermalin BE, Weisbach MS (2010) The role of boards of directors in corporate governance: a conceptual framework and survey. J Econ Lit 48:58–107CrossRef

Akerlof G, Romer P (1993) Looting: the economic underworld of bankruptcy for profit. Brook Pap Econ Act 24(2):1–74CrossRef

Berger AN, Udell GF (1995) Relationship lending and lines of credit in small firm finance. J Bus 68:351–381CrossRef

Bharath S, Dahiya S, Saunders A, Srinivasan A (2007) So what do I get? The bank’s view of lending relationships. J Financ Econ 85:368–419CrossRef

Bharath S, Dahiya S, Saunders A, Srinivasan A (2011) Lending relationships and loan contract terms. The Review of Financial Studies 24:1141–1203CrossRef

Bhattacharya S, Thakor AV (1993) Contemporary banking theory. J Financ Intermed 3:2–50CrossRef

Bliss BA, Cheng Y, Denis DJ (2015) Corporate payout, cash retention, and the supply of credit: evidence from the 2008–2009 credit crisis. J Financ Econ 115:521–540CrossRef

Boot A, Thakor A (1994) Moral hazard and secured lending in an infinitely repeated credit market game. Int Econ Rev 35:899–920CrossRef

Boyd JH, Prescott EC (1986) Financial intermediary-coalitions. J Econ Theory 38:211–232CrossRef

Brickley JA, Linck JS, Smith CW (2003) Boundaries of the firm: evidence from the banking industry. J Financ Econ 70:351–383CrossRef

Campello M, Giambona E, Graham JR, Harvey CR (2011) Liquidity management and corporate investment during a financial crisis. The Review of Financial Studies 24:1944–1979CrossRef

Campello M, Graham JR, Harvey CR (2010) The real effects of financial constraints: evidence from a financial crisis. J Financ Econ 97:470–487CrossRef

Chava S, Purnanandam A (2011) The effect of banking crisis on bank-dependent borrowers. J Financ Econ 99:116–135CrossRef

Chava S, Roberts MR (2008) How does financing impact investment? The role of debt covenants. The Journal of Finance 63:2085–2121CrossRef

Cornett MM, McNutt JJ, Strahan PE, Tehranian H (2011) Liquidity risk management and credit supply in the financial crisis. J Financ Econ 101:297–312CrossRef

Coval JD, Moskowitz TJ (2001) The geography of investment: informed trading and asset prices. J Polit Econ 109:811–841CrossRef

Dahiya S, Saunders A, Srinivasan A (2003) Financial distress and bank lending relationships. The Journal of Finance 58:375–399CrossRef

Degryse H, Ongena S (2005) Distance, lending relationships, and competition. The Journal of Finance 60:231–266CrossRef

Denis DJ, Wang J (2014) Debt covenant renegotiations and creditor control rights. J Financ Econ 113:348–367CrossRef

Diamond DW (1984) Financial intermediation and delegated monitoring. Rev Econ Stud 51:393–414CrossRef

Diamond DW (1991) Monitoring and reputation: the choice between bank loans and directly placed debt. J Polit Econ 99:689–721CrossRef

Engelberg J, Gao P, Parsons CA (2012) Friends with money. J Financ Econ 103:169–188CrossRef

Freudenberg F, Imbierowicz B, Saunders A, Steffen S (2017) Covenant violations and dynamic loan contracting. Journal of Corporate Finance 45:540–565CrossRef

Fu F, Lin L, Officer MS (2013) Acquisitions driven by stock overvaluation: are they good deals? J Financ Econ 109:24–39CrossRef

Godlewski CJ (2019) Debt renegotiation and the design of financial contracts. J Financ Serv Res 55:191–215CrossRef

Gopalan R, Nanda V, Yerramilli V (2011) Does poor performance damage the reputation of financial intermediaries? Evidence from the loan syndication market. The Journal of Finance 66:2083–2120CrossRef

Gorton G (2009) Information, liquidity, and the (Ongoing) Panic of 2007. Am Econ Rev 99:567–572CrossRef

Graham JR, Harvey CR (2001) The theory and practice of corporate finance: evidence from the field. J Financ Econ 60:187–243CrossRef

Hadlock CJ, Pierce JR (2010) New evidence on measuring financial constraints: moving beyond the KZ index. The Review of Financial Studies 23:1909–1940CrossRef

Haselmann R, Schoenherr D, Vig V (2018) Rent seeking in elite networks. J Polit Econ 126:1638–1690CrossRef

Ippolito F, Almeida H, Perez-Orive A, Acharya V (2019) Bank lines of credit as contingent liquidity: covenant violations and their implications. Journal of Financial Intermediation 44(100817)

Ivashina V (2009) Asymmetric information effects on loan spreads. J Financ Econ 92:300–319CrossRef

Ivashina V, Kovner A (2011) The private equity advantage: leveraged buyout firms and relationship banking. The Review of Financial Studies 24:2462–2498CrossRef

Ivashina V, Nair VB, Saunders A, Massoud N, Stover R (2009) Bank debt and corporate governance. The Review of Financial Studies 22:41–77CrossRef

Ivashina V, Scharfstein D (2010) Bank lending during the financial crisis of 2008. J Financ Econ 97:319–338CrossRef

James C (1987) Some evidence on the uniqueness of bank loans. J Financ Econ 19:217–235CrossRef

Jiangli W, Unal H, Yom C (2008) Relationship lending, accounting disclosure, and credit availability during the asian financial crisis. Journal of Money, Credit and Banking 40:25–55CrossRef

Jiménez G, Lopez JA, Saurina J (2009) Empirical analysis of corporate credit lines. The Review of Financial Studies 22:5069–5098CrossRef

Karolyi SA (2018) Personal lending relationships. The Journal of Finance 73:5–49CrossRef

Khwaja AI, Mian A (2005) Do lenders favor politically connected firms? Rent provision in an emerging financial market. The Quarterly Journal of Economics 120:1371–1411CrossRef

Kim K, Mauldin E, Patro S (2014) Outside directors and board advising and monitoring performance. J Account Econ 57:110–131CrossRef

La Porta R, Lopez-de Silanes F, Zamarripa G (2003) Related lending. The Quarterly Journal of Economics 118:231–268CrossRef

Lummer SL, McConnell JJ (1989) Further evidence on the bank lending process and the capital-market response to bank loan agreements. J Financ Econ 25:99–122CrossRef

Mathers AM, Giacomini E (2016) A note on capital IQ’s credit line data. Financial Review 51:435–461CrossRef

Millon MH, Thakor AV (1985) Moral hazard and information sharing: a model of financial information gathering agencies. The Journal of Finance 40:1403–1422CrossRef

Murfin J (2012) The supply-Side determinants of loan contract strictness. The Journal of Finance 67:1565–1601CrossRef

Nini G, Smith DC, Sufi A (2012) Creditor control rights, corporate governance, and firm value. The Review of Financial Studies 25:1713–1761CrossRef

Panyagometh K, Roberts GS (2010) Do lead banks exploit syndicate participants? evidence from ex post risk. Financ Manag 39:273–299CrossRef

Petersen MA, Rajan RG (1994) The benefits of lending relationships: evidence from small business data. The Journal of Finance 49:3–37CrossRef

Petersen MA, Rajan RG (2002) Does distance still matter? The information revolution in small business lending. The Journal of Finance 57:2533–2570CrossRef

Qi S, Ongena S (2020) Fuel the engine: bank credit and firm innovation. J Financ Serv Res 57:115–147CrossRef

Ramakrishnan RTS, Thakor AV (1984) Information reliability and a theory of financial intermediation. Rev Econ Stud 51:415–432CrossRef

Roberts MR (2015) The role of dynamic renegotiation and asymmetric information in financial contracting. J Financ Econ 116:61–81CrossRef

Roberts MR, Sufi A (2009) Renegotiation of financial contracts: evidence from private credit agreements. J Financ Econ 93:159–184CrossRef

Ross DG (2010) The dominant bank effect: how high lender reputation affects the information content and terms of bank loans. The Review of Financial Studies 23:2730–2756CrossRef

Schenone C (2010) Lending relationships and information rents: do banks exploit their information advantages? The Review of Financial Studies 23:1149–1199CrossRef

Song WL (2004) Competition and coalition among underwriters: the decision to join a syndicate. The Journal of Finance 59:2421–2444CrossRef

Strahan PE (1999) Borrower risk and the price and nonprice terms of bank loans. Federal Reserve Bank of New York Working Paper

Sufi A (2009) Bank lines of credit in corporate finance: an empirical analysis. The Review of Financial Studies 22:1057–1088CrossRef

Whited TM, Wu G (2006) Financial constraints risk. The Review of Financial Studies 19:531–559CrossRef

Yun H (2009) The choice of corporate liquidity and corporate governance. The Review of Financial Studies 22:1447–1475CrossRef

Titel: Connected Lending in Bank Lines of Credit
verfasst von: Shu Feng
Chang Liu
Xiaoling Pu
Publikationsdatum: 11.06.2021
Verlag: Springer US
Erschienen in: Journal of Financial Services Research / Ausgabe 2/2022
Print ISSN: 0920-8550
Elektronische ISSN: 1573-0735
DOI: https://doi.org/10.1007/s10693-021-00354-z