Taking No Chances: Lender Monitoring and Managerial Risk-Taking

63 Pages Posted: 14 Jan 2020 Last revised: 12 Jul 2021

See all articles by Luca X. Lin

Luca X. Lin

HEC Montreal - Department of Finance

Date Written: July 11, 2021

Abstract

Using mergers between firms' existing lenders as shocks to lead-lender monitoring incentives and bargaining power beyond contractual provisions, I find that intensified lender monitoring significantly reduces treated firms' risk-taking, as revealed by acquisition decisions. However, lender mergers reduce shareholder-value-enhancing acquisitions as well as value-destroying ones. Deals that do happen target cash-rich firms with stable incomes. Lender mergers also reduce leverage, sales/earnings volatility, and earnings management. The results are driven by less bank-dependent firms in which lenders are less subject to bank scrutiny ex-ante. The evidence suggests that lender monitoring deters managerial risk-taking, sometimes inducing behavior that can be over-conservative for shareholders.

Keywords: Mergers and Acquisitions, Lender Monitoring, Creditor Governance, Bank Mergers

JEL Classification: G21, G30, G34

Suggested Citation

Lin, Luca Xianran, Taking No Chances: Lender Monitoring and Managerial Risk-Taking (July 11, 2021). Available at SSRN: https://ssrn.com/abstract=3507617 or http://dx.doi.org/10.2139/ssrn.3507617

Luca Xianran Lin (Contact Author)

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada

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