The effect of banking relationships on the future of financially distressed firms

Rosenfeld, Claire M.

doi:10.1016/j.jcorpfin.2014.01.003

Cited by 30 publications

(8 citation statements)

References 36 publications

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“…Their results demonstrate that relationship lenders are associated with a lower firms’ probability of default, which also means that during bad times the provision of small business credit scoring loans by transactional lenders is associated with a deterioration in borrower ex post performance. Rosenfeld () finds similar results for the USA, showing that relationship lending can help banks detect which firms are more likely to recover from a temporary shock and eventually support them financially.…”

Section: Relationship Lending In Times Of Financial Distress For Lendmentioning

confidence: 82%

Is Relationship Lending Still a Mixed Blessing? A Review of Advantages and Disadvantages for Lenders and Borrowers

Duqi

Tomaselli

Torluccio

2017

Journal of Economic Surveys

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Relationship lending is a common lending technology that is assumed to bring several benefits to small‐medium enterprises (SMEs) and to financial institutions that adopt it. Notably, it could reduce information asymmetries, permitting banks to offer better credit terms to the borrower. However, it also entails some costs for both sides. The empirical evidence so far has not been conclusive in determining under what conditions relationship lending can be beneficial or harmful. Most of the studies suggest that SMEs that engage in relationship lending benefit from more credit availability (especially during a financial crisis), and lower interest rates. This occurs when they are served by small banks, are geographically close to the lender, when the bank is adequately decentralized and when it is the dominant creditor of the firm. However, under certain circumstances, banks can extract rents from the borrower or be captured by him. In addition, the consequences and the future of relationship lending will be remarkably affected by the level of competition among banks, their ownership structure, the regulatory framework and the business model that banks will have to adopt accordingly.

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Section: Relationship Lending In Times Of Financial Distress For Lendmentioning

confidence: 82%

Is Relationship Lending Still a Mixed Blessing? A Review of Advantages and Disadvantages for Lenders and Borrowers

Duqi

Tomaselli

Torluccio

2017

Journal of Economic Surveys

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“…Bhattacharjee, Higson, Holly, and Kattuman (2009) and Tinoco and Wilson (2013) find macroeconomic conditions affect firms' financial distress. Furthermore, bank relationship may be another determinant of financial distress (Höwer, 2016; Rosenfeld, 2014).…”

Section: Literature Reviewmentioning

confidence: 99%

“…Numerous firms have gone into bankruptcy in developed countries since the Global Financial Crisis (GFC), which has given rise to emerging studies of the forecasting, determinants and resolution of financial distress (Almamy, Aston, & Ngwa, 2016; Fan, Huang, & Zhu, 2013; Höwer, 2016; Koh, Durand, Dai, & Chang, 2015; Richardson, Lanis, & Taylor, 2015; Rosenfeld, 2014).…”

Section: Introductionmentioning

confidence: 99%

The impact of tunnelling on financial distress and resolution: Evidence from listed firms in China

Yang

2020

Int. J Fin Econ

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We examine the impact of tunnelling on financial distress in Chinese stock markets, where the agency problem is common due to the weak legal system protecting minority shareholders' interests. Investigating the widespread financial distress among listed firms during the time period 1999–2015, we find that tunnelling is a determinant of financial distress–tunnelling not only leading to financial distress but also prohibiting distress recovery. Regulatory improvements aiming to reduce tunnelling behaviour contribute to the resolution of financial distress, but there is still room to improve. Our results show that state ownership has limited influence on firm operation before financial distress but tends to benefit recovery from periods of distress, which depicts the market economy mechanism in China. Our findings are robust to the potential endogeneity issue and various measures of financial distress.

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“…Some recent studies also discover favorable effects of strong relationships on firm performance. Specifically, one study of publicly traded U.S. companies finds that strong relationships increase the likelihood of success of moderately financially distressed firms (Rosenfeld 2011), another study finds that relationships aid in resolution of Chapter 11 bankruptcy proceedings (Dahiya, John, Puri, and Ramirez 2003), and a study of Italian manufacturers yields a positive association between relationship strength and innovation by borrowing firms (Herrera and Minetti 2007).…”

Section: Benefits From Strong Relationshipsmentioning

confidence: 99%

Do Small Businesses Still Prefer Community Banks?

2013

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We formulate and test hypotheses about the role of bank type -small versus large, single-market versus multimarket, and local versus nonlocal banks -in banking relationships. The conventional paradigm suggests that "community banks" -small, single-market, local institutions -are better able to form strong relationships with informationally opaque small businesses, while "megabanks" -large, multimarket, nonlocal institutionstend to serve more transparent firms. Using the 2003 Survey of Small Business Finance (SSBF), we conduct two sets of tests. First, we test for the type of bank serving as the "main" relationship bank for small businesses with different firm and owner characteristics. Second, we test for the strength of these main relationships by examining the probability of multiple relationships and relationship length as functions of main bank type and financial fragility, as well as firm and owner characteristics. The results are often not consistent with the conventional paradigm, perhaps because of changes in lending technologies and deregulation of the banking industry.JEL Classification Numbers: G21, G28, G34

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The effect of banking relationships on the future of financially distressed firms

Cited by 30 publications

References 36 publications

Is Relationship Lending Still a Mixed Blessing? A Review of Advantages and Disadvantages for Lenders and Borrowers

Is Relationship Lending Still a Mixed Blessing? A Review of Advantages and Disadvantages for Lenders and Borrowers

The impact of tunnelling on financial distress and resolution: Evidence from listed firms in China

Do Small Businesses Still Prefer Community Banks?

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