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Using mergers between firms’ existing lenders as shocks to the incentive and bargaining power to monitor, I find that intensified lender monitoring significantly reduces borrowers’ public takeover activities. The effect… Click to show full abstract
Using mergers between firms’ existing lenders as shocks to the incentive and bargaining power to monitor, I find that intensified lender monitoring significantly reduces borrowers’ public takeover activities. The effect is driven by mergers involving lead lenders, and becomes stronger for less bank-dependent firms with more risk-taking tendencies. However, lender mergers reduce not only acquisitions that are value-destroying to shareholders but also value-enhancing ones. Deals that do happen create no additional shareholder value and target cash-rich firms with stable incomes. These results suggest that lender monitoring mitigates agency concerns, yet it also leads to over-conservative firm behavior.
Journal Title: Governance
Year Published: 2020
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