Information asymmetries and the effects of banking mergers of firm-bank relationships
Abstract: This study examines the effects of mergers between commercial banks and investment banks on firm-bank relationships and the pricing of loan contracts, focusing on the role of information asymmetries. I find that, prior to a public securities issuance, junk rated firms are more likely to switch lenders to a merged commercial-investment bank when their existing lenders are pure commercial banks. Borrowers that issue public securities and are in local lending relationships are less likely to switch lenders after their bank merges with an investment bank. Also, when issuing public debt, junk-rated firms and companies in local lending relationships are likely to select their commercial-investment bank as underwriter. The revealed preference by firms that issue informationally sensitive securities for commercial-investment bank relationships suggests that there are benefits from the bank?s ability to use private information from lending in investment banking. After merging with investment banks, commercial banks raise the interest rates of their junk rated and local continuing borrowers, but only when the firm has a single lending relationship, consistent with banks having information monopolies that allow for the extraction of merger-related gains. Mergers between commercial and investment banks do not affect firm-bank relationships or borrowing costs when the bank is less likely to acquire private information through lending or when firms are unlikely to issue public securities. Additional tests show that the findings are not likely due to mergers between commercial banks, changes in economic conditions, or poor ex-post performance of borrowers.
Status: Published in Conference on Bank Structure and Competition (2005 : 41th) ; The art of the loan in the 21st century : producing, pricing, and regulating credit
Provider: Federal Reserve Bank of Chicago
Part of Series: Proceedings
Publication Date: 2005