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Journal of Financial Services Research

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04-01-2022

Disrupted Lending Relationship and Borrower's Strategic Default

Authors: Panagiotis Avramidis, Ioannis Asimakopoulos, Dimitris Malliaropulos

Published in: Journal of Financial Services Research | Issue 1/2023

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Abstract

Using a sample of bank loans to firms operating in the Greek tourism sector, and regional variation of tourism activities to identify the strategic defaulted firms, we examine the impact of bank consolidation on the firms’ payment behavior. We show that a merger-induced impairment of the lending relationship is related to a higher likelihood of strategic default by the target bank’s borrowers. In contrast, mergers with a limited impact on the lending relationship have no effect on the probability of strategic default of target bank’s borrowers. The results highlight the importance of relationship lending benefits in mitigating strategic default risk. Our findings are robust to the alternative interpretation of soft budget constraints.

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Empirical evidence using Greek loan and firm data shows that one out of six firms with non-performing loans across all sectors of the economy was a strategic defaulter during the crisis (Asimakopoulos et al. 2017).

In a comparative study of corporate earnings management across 31 countries, Leuz et al. (2003) place Greece at the top two countries with the strongest degree of earnings management. They identify investor protection as a key factor affecting the quality of companies’ reported earnings.

The empirical evidence on strategic default comes primarily from the consumer credit market (i.e. Clark et al., 2021, Guiso et al., 2013; Elul et al., 2010; Fay et al., 2002; Gross and Souleles, 2002; Deng et al., 2000).

Indicatively, non-performing loans that amounted to 14 bn euros at the end of 2008 (or 5.7% of total loans) jumped to 68 bn euros (31%) at the end of 2012, climbing to an all-time high of 107 bn euro (49%) at the end of March 2016. For a detailed analysis of the events surrounding the Greek crisis see https://www.bankofgreece.gr/Publications/The%20Chronicle%20Of%20The%20Great%20Crisis.pdf and Gourinchas et al. (2017).

For a comprehensive analysis of the restructuring of the Greek banking system, see https://www.bankofgreece.gr/Publications/Report_on_the_recapitalisation_and_restructuring.pdf

The fourth systemic bank did not acquire any loans related to the tourism industry and therefore it is omitted from the analysis.

Banks report total exposures per business customer, provided that they exceed 1 million euro. However, according to the Bank of Greece’s Governor Acts, if one of the connected borrowers has an exposure that exceeds 1 million euro, banks report the exposures of all the connected borrowers, irrespective of the size of individual exposures.

The Hellenic Statistical Authority collects these data in implementation of the Regulation (EU) No 692/2011 of the European Parliament and the European Council on the collection of statistical information in the field of tourism. The data are also available on the website of the Greek Tourism Confederation, www.sete.gr

Non-listed firms published financial statements once a year, usually with a lag between six and nine months following the accounting year-end. In addition, for many smaller in size firms (indicatively firms that do not exceed two of the three criteria of asset size up to 4 million euro, turnover up to 8 million euro and average personnel up to 50) financial statements were audited by professional accountants and not by certified auditors.

Alternative classification methods, like median split, yield statistically and economically equivalent results. However, we choose the cluster analysis as our main method because it does not require a predetermined proportion of the observations within each group like the median, which splits the sample evenly. Because of this property, it also helps us to assess if the use of actual financial accounts data over- or under-estimates the strategic default rates.

All acquisitions were effectively completed before banks reported their updated loan portfolio to the Bank of Greece for the year 2013, with one exception in which case the target bank’s loans were reported by the acquirer bank in 2014. Omitting the latter case from our sample made no difference to the empirical findings.

In the presence of fixed effects, the estimated effects of time invariant characteristics such as the main effect \({\beta }_{2}\) of the borrower's bank type \({X}_{i}\) need to be interpreted with caution.

The marginal effects in Table 7 columns (5)-(6) using actual financial accounts suggest that the probability of strategic default increases by 9.41 (or 6.81 percentage points), significantly higher compared to the marginal effects produced by the model using the estimated financial accounts.

See indicatively the speech of the Chair of the Supervisory Board of the ECB on banks’ profitability and the need for consolidation.

https://www.bankingsupervision.europa.eu/press/speeches/date/2020/html/ssm.sp200610~27b3ba0a0d.en.html

Dahiya, et al. (2003) find that a significant proportion of firms, whose loans are sold, file for bankruptcy within three years of the loan sale announcement. Interestingly, these firms are not the worst-performing firms in their industry at the time of the loan sale.

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Title: Disrupted Lending Relationship and Borrower's Strategic Default
Authors: Panagiotis Avramidis
Ioannis Asimakopoulos
Dimitris Malliaropulos
Publication date: 04-01-2022
Publisher: Springer US
Published in: Journal of Financial Services Research / Issue 1/2023
Print ISSN: 0920-8550
Electronic ISSN: 1573-0735
DOI: https://doi.org/10.1007/s10693-021-00368-7