The costs of lead bank--distressed borrower relationships: evidence from commercial lending in Taiwan

Tseng-Chung Tang

The Service Industries Journal, 2008, vol. 30, issue 9, 1549-1563

Abstract: This is the first study to investigate the impact of the adjudication of a borrower's reorganisation filing on the shareholder wealth of the lead bank. The results reveal that the market is acutely sensitive to adverse information and the reorganisation adjudication of a borrower's plan has a detrimental effect on the reputation and wealth of the lead bank. Further, while both are positively associated with wealth effects, the RATE of the loan-level variable is more highly related than the LEVERAGE of the borrower-level variable to wealth loss. Additionally, large lenders experience less wealth loss. The higher the bank debt of a firm, the higher the adverse abnormal returns to the lead bank. Higher collateral and rates on loans are used to compensate for the greater risk of the loan portfolio. Likewise, the market may view lead banks with high loan loss reserves as banks that are not particularly adept at identifying creditworthy borrowers.

Date: 2008
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DOI: 10.1080/02642060802626790

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The Service Industries Journal is currently edited by Eileen Bridges, Professor Domingo Ribeiro, Ronald Goldsmith, Barry Howcroft and Youjae Yi

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