Bank monitoring and M&A returns

Abstract

In this paper, I examine the corporate governance role of creditors by investigating the effect of creditors’ monitoring on the profitability of firm acquisitions. To examine the effect of the monitoring, I look at the syndicated loan structure and use the shares retained by the lead arranger as a proxy for monitoring level. Despite the importance of syndicated loan and the uniqueness of syndication process, studies do not examine the effect of monitoring on firm governance, and little is known about how syndicated loan structure address and mitigate moral hazard problems within the syndicate. Also, there is a lack of more direct evidences that creditors monitor corporate decisions to the extent that enhances the firm value. This paper attempts to fill this gap by providing empirical evidences that the lead arranger’s monitoring makes value-adding acquisition. I find that acquirer announcement returns are positively related to the shares retained by the lead arranger. The effect of the lead arranger’s shares on the acquirer’s return become apparent in cash M&A deals and stronger when financial covenants exist. These results can be interpreted that the lead arrangers are more interested in cash M&A deals and make an effort to monitor these deals, and that the financial covenant improves the efficiency of monitoring activities.