Does banking relationship matter in financial distress spillover?

Authors: Li-Chiu Chi

Journal: Chiao Da Management Review. Jun. 2015, 35(1): 73-97.

Keywords:
Financial distress; Reorganization; Lender; Spillover effects

Abstract:
Given that the direct lender-borrower interconnectedness and propinquity are critical means of efficient risk transfer, the financial distress involves the negative propagation through inter-sector spillovers. This study documents a small but significant and non-transitory adverse valuation effect of reorganization filing on the value of the troubled sample data. However, it is striking to note that the lender is resilient to the p ropagation of borrower distress. There is not too much noteworthy impact on relationship banks upon the filing proclamation. This study also shows that the loan interest rate, borrower leverage, and borrower profit efficiency help enlighten the stock market differentiation to bad filer-based news on its lender. More specifically, this empirical study finds that the lower the interest rate imposed by top lenders, the greater the degree of inter-sector spillovers. In addition, this study reveals that the negative externality effect dominates the positive one when the sample data is confined to a high level of total liabilities by total assets. Finally, the greater the value of the net income by assets, the more capable it is in predicting results.