RFS Advance Access originally published online on June 19, 2008
Review of Financial Studies 2009 22(1):41-77; doi:10.1093/rfs/hhn063
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Bank Debt and Corporate Governance
Harvard University
Wharton School, University of Pennsylvania
Leonard N. Stern School of Business, New York University
Schulich School of Business, York University
Iowa State University
Send correspondence to Victoria Ivashina, Harvard Business School, Baker Library 233, Boston, MA 02116, or telephone (617) 495-8018, or fax (617) 495-6198, or e-mail: vivashina{at}hbs.edu.
JEL Classification: G10, G20, G21, G34
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Abstract |
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In this paper, we investigate the disciplining role of banks and bank debt in the market for corporate control. We find that relationship bank lending intensity and bank client network have positive effects on the probability of a borrowing firm becoming a target. This effect is enhanced in cases where the target and acquirer have a relationship with the same bank. Moreover, we utilize an experiment to show that the effects of relationship bank lending intensity on takeover probability are not driven by endogeneity. Finally, we also investigate reasons motivating a bank's informational role in the market for corporate control.
The authors would like to thank an anonymous referee, the editors, Yakov Amihud, Allen Berger, Andrew Metrick, and Randall Morck as well as seminar participants at the Australasian Conference of Banking and Finance, the European Financial Association Meeting in Maastricht, for helpful comments. Guo Hou, Rahul Ravi, Igor Semenenko, and Federica Pazzaglia provided excellent research assistance. Massoud would like to acknowledge financial support from the Social Sciences and Humanities Research Council of Canada.