Year of Publication

2014

Degree Name

Doctor of Philosophy (PhD)

Document Type

Doctoral Dissertation

College

Business and Economics

Department

Finance and Quantitative Methods

First Advisor

Dr. Donald J. Mullineaux

Second Advisor

Dr. Kristine Hankins

Abstract

Evidence shows that nonbanks, which are now significant participants in the corporate loan market, exploit information gained from lending to trade in public securities. In the first essay, I examine whether these institutions use loan-based information to facilitate merger and acquisition (M&A) deals. I find that firms are more likely to become targets if they borrow from nonbanks rather than banks. Borrowing from a larger number of nonbanks or from those with a sizeable client network also enhances a firm’s acquisition prospects. When nonbanks gain more information about borrowers through loan amendments or multiple loans, the impact of nonbank lending grows stronger. I also identify three channels that might allow nonbanks to exploit loan-based information in the M&A market.

In the second essay, I focus on the difference in covenant structure between nonbank loans and bank loans. Previous studies show that loans to riskier borrowers are more likely to have stronger financial covenants in order to mitigate agency problems and conflicts of interest between debt and equity holders. Interestingly, I find that nonbanks loans have fewer, less restrictive financial covenants than commercial banks, all else equal. Although the prior literature shows that banks play an active role in corporate governance following covenant violations, I find that nonbanks are less likely to intervene in borrowers’ decision making in similar circumstances. Nonbank borrowers are significantly more likely than bank clients to experience severe financial distress.

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