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Lending Relationships and the Effect of Bank Distress: Evidence from the 2007-2008 Financial Crisis

2011; RELX Group (Netherlands); Linguagem: Inglês

10.2139/ssrn.1696246

1556-5068

Daniel Carvalho, Miguel A. Ferreira, Pedro Matos,

Corporate Finance and Governance

We study the transmission of bank distress to nonfinancial firms from 34 countries during the 2007-2009 financial crisis using systemic and bank-specific shocks. We find that bank distress is associated with equity valuation losses and investment cuts to borrower firms with the strongest lending relationships with banks. The losses are not offset by borrowers’ access to public debt markets and are concentrated in firms with the greatest information asymmetry problems and with the weakest financial positions. Our findings suggest that public debt markets do not mitigate the effects of relationship bank distress during financial crises.