Banking relationship, information reusability, and acquisition loans

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.(c) 2022 Elsevier B.V. All rights reserved.

Automated summary

This study investigates whether and how banks reuse information across different but related borrowers in financing mergers and acquisitions. The findings suggest that stronger prior lending relationships between acquisition loan lenders and acquisition targets are associated with lower spreads and fewer covenant restrictions on acquisition loans. This effect is stronger when there is higher information asymmetry about the target firm.