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Banking relationship, information reusability, and acquisition loans

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  • Chu, Yongqiang
  • Li, Zeguang

Abstract

We study whether and how banks reuse information across different but related borrowers in financing mergers and acquisitions. We find that stronger prior lending relationships between acquisition loan lenders and acquisition targets are associated with lower spreads and fewer covenant restrictions on acquisition loans. We show that the results are unlikely to be driven by unobservable acquirer, target, or lender characteristics. Consistent with the information asymmetry hypothesis, the effect is stronger when information asymmetry about the target firm is higher. We also find that the result is not driven by the coinsurance effect.

Suggested Citation

  • Chu, Yongqiang & Li, Zeguang, 2022. "Banking relationship, information reusability, and acquisition loans," Journal of Banking & Finance, Elsevier, vol. 138(C).
  • Handle: RePEc:eee:jbfina:v:138:y:2022:i:c:s0378426622000498
    DOI: 10.1016/j.jbankfin.2022.106449
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