Multiple Lenders and Corporate Distress: Evidence on Debt Restructuring

Review of Economic Studies (Impact Factor: 2.81). 04/2008; 75(2):415-442. DOI: 10.2139/ssrn.302351
Source: RePEc

ABSTRACT Multiple banking is a common characteristic of the corporate lending, particularly of medium-sized and large firms. However, if the firms are facing distress, multiple lenders may have serious coordination problems, as has been argued in the theoretical literature. In this paper we analyse the problems of multiple banking in borrower distress empirically. We rely on a unique panel data set that includes detailed credit-file information on distressed lending relationships in Germany. In particular, it includes information on "bank pools", a legal institution aimed at coordinating lender interests in distress. We find that the existence of small pools increases the probability of workout success and that this effect reverses when pools become large. We identify major determinants of pool formation, in particular the number of banks, the distribution of lending among banks, and the severity of the distress. Copyright 2008 The Review of Economic Studies Limited.


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