Should I Stay or Should I go Now? The Effect of Bank Mergers on Bank-Firm Relationships in Japan

This study investigates the effects of bank mergers on bank-firm relationships. Bank merger announcements are shown to increase the probability of bank-firm relationship termination. This finding is robust both to nonlinear and linear probability model analysis and to adjustments for censoring in the data. Those firms that find their bank relationship terminated following a bank merger experience a significant reduction in lending from their former main bank. Healthy firms are able to compensate with loans from other banks. However, unhealthy zombie firms that experience a loss of their main bank relationship experience a larger drop in credit supply to begin with and are unable to compensate for the loss with loans from other banks, so total borrowing declines precipitously. These findings provide evidence of hold-up costs and the balance sheet problem in banking and suggest that bank mergers may alleviate those sub-optimal outcomes, improving capital allocation.