| Long-term relationships between banks and firms have been shown to be valuable to small firms in terms of increased credit availability and protection against adverse credit shocks. The limited empirical evidence of lower interest rates on relationship loans suggests that banks capture some of the value created by lending relationships, indicating that lending relationships should be valuable to banks, as well as to firms. Few studies, however, investigate the effects of lending relationships on bank value. This dissertation contributes to the literature on relationship-based finance by addressing that deficiency.; Legislative changes and the consolidation of the banking industry over the last decade have enabled banks to increase in size and scope. Since there is a negative correlation between a bank's size and its portfolio share of small business loans, it is important to understand the contribution of relationship lending to bank value. I approach this research question using two different frameworks. First, to what extent are customer relationships, as measured by the volume of small business loans held by banks deemed to be valuable by the market? Second, to what extent are small business loans held by target banks valued by individual acquirers?; In Chapter 1, I estimate a market valuation model using small business loan data from the annual small business lending survey filed with the June call reports. The empirical model allows me to identify the value of relationship-based finance for publicly traded banks between 1993 and 1998. I find that relationship lending is a source of bank value, but this value varies across the different size classes of banks.; In Chapter 2, I estimate a bank acquisition-pricing model for a large sample of target banks that were acquired between 1993 and 1998. This study infers the value of lending relationships to acquirer banks by examining the determinants of acquisition premiums paid to target banks. Results suggest that acquirers, on average, paid positive acquisition premiums for the small business loan portfolios of banks with less than {dollar}300 million in assets. |
