Banks and Bubbles: How Good are Bankers at Spotting Winners?

42 Pages Posted: 17 Jan 2006

See all articles by Laura Gonzalez

Laura Gonzalez

California State University, Long Beach - Department of Finance, Real Estate & Law; Fordham University

Christopher M. James

University of Florida - Department of Finance, Insurance and Real Estate

Abstract

This paper examines the bank lending relationships of a large sample of technology and non-technology firms that went public during the 1996 through 2000 period. We use a unique hand collected dataset to examine the characteristics of firms that establish pre-IPO bank lending relationships and whether post-IPO performance is related to the existence and size of pre-IPO banking relationships. We find that the majority of IPO firms have banking relationships before they go public. Firms with banking relationships are older, more profitable or - in the case of tech firms have lower losses, and are more likely to have funding from venture capitalists than firms without banking relationships. We also find that banks lent aggressively to technology firms in the sense that current earnings and cash flows were significantly less important in determining banking relationships for technology firms than for non-technology firms. Consistent with the importance of so called soft information in lending decisions, we find that controlling for ex ante observable risk measures, there is a positive and significant relationship between improvements in post-IPO operating performance and the existence and size of pre-IPO banking relationships. Overall, our results indicate that firms with the best current and future prospects establish banking relationships. Our findings provide an explanation as to why investors may interpret lending relationships as a positive signal of firm quality.

JEL Classification: G30, G21, G24

Suggested Citation

Gonzalez, Laura and James, Christopher M., Banks and Bubbles: How Good are Bankers at Spotting Winners?. Journal of Financial Economics (JFE), Vol. 86, No. 1, 2007. Available at SSRN: https://ssrn.com/abstract=875020

Laura Gonzalez (Contact Author)

California State University, Long Beach - Department of Finance, Real Estate & Law ( email )

United States

Fordham University ( email )

2008-2016
New York University Visiting Scholar 2014
New York, NY NY 10023
United States

Christopher M. James

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611-7168
United States
352-392-3486 (Phone)
352-392-0301 (Fax)

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