Essays on the effects of banking relationships

Essay #1. Financially distressed firms, by definition, need funding to remain solvent. Repeated lending may provide banks information on the condition of a firm that is otherwise unobservable. In the case of financial distress, when the true state of the firm is difficult to discern, prior (relationship) lenders may have valuable insights. Using hand-collected data, I empirically examine U.S. publicly traded firms to determine the impact of banking relationships on the future of financially distressed firms. I find that banking relationships have a significantly positive impact on the future success of firms, so long as the sample does not solely consist of severely distressed firms. In that case, there is no effect of lending relationships on the future performance of severely financially distressed firms. Evidence shows that the value of banking relationships is determined by proxies for information asymmetry and the firm's prior reliance upon relationship funding. Even after controlling for endogeneity, I find strong evidence that banking relationships have a significantly positive impact on the future success of moderately financially distressed firms. Further, upon expanding the analysis to include non-financially distressed firms, I find evidence that obtaining relationship funding maintains a significantly positive impact on future firm success. These results are robust to variations on the sample definition of financial distress as well as the degree and definition of failure.; Essay #2. I analyze the same-day and long-term performance of distressed loan announcements. Consistent with prior studies, I find that firms announcing distressed loans experience significantly positive abnormal returns. I also find that the most severely distressed firms experience the economically largest abnormal returns. Further, financially distressed firms with relationship loans have higher abnormal returns than firms backed by new lenders; this discrepancy is economically largest for the most severely distressed firms. Long-term performance analysis shows that financially distressed firms experience insignificant abnormal returns following their distressed loan announcements. However, non-relationship backed firms suffer significantly worse long-term performance than relationship-backed firms. These findings provide evidence that banks provide certification of firm quality and that the market reacts to new information on bank funding decisions.