Financial Distress and Bank Lending Relationships

  • Author(s): Sandeep Dahiya, Anthony Saunders, Anand Srinivasan
  • Published: Feb 12, 2003
  • Pages: 375-399
  • DOI: 10.1111/1540-6261.00528

We use a unique data set of bank loans to examine the wealth effects on lead lending banks when their borrowers suffer financial distress. We find a significant negative announcement return for the lead lending bank when a major corporate borrower announces default or bankruptcy. Banks with higher exposure to the distressed firm have larger negative announcement‚Äźperiod returns. The existence of a past lending relationship with the distressed firm results in larger wealth declines for the bank shareholders. Finally, financial distress also has a significant negative effect on borrower's returns.

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