Lender Effects on Gains from Mergers and Acquisitions

Abstract

We employ textual analysis to identify mergers and acquisitions (M&As) financed by corporate loans and provide evidence that acquirer announcement returns are higher in loan-financed M&As. Utilizing an instrumental variable approach and difference-in-difference analysis, we confirm that lenders contribute to the higher acquirer returns in loan-financed M&As. Our findings support the view that lenders differ in their ability to screen and monitor borrowers and that their ability is persistent. We also find evidence that lenders’ participation in the M&A market can resolve uncertainty about M&A deal quality, improve corporate governance by preventing value-destroying M&As, and provide long-term monitoring benefits to acquirer shareholders.

Keywords: M&As, loan financing, Corporate Governance, lending relationship, uncertainty resolution, lender ability, Textual Analysis