Passing the Parcel ? Banking Relationships at the Onset of Financial Distress

This paper explores banks' strategies during five years prior to a firm's default. We document that for firms that will eventually fail, the number of lenders continuously increases until about one year before the default, allowing banks with long standing relationships to reduce their exposure well before the firm approaches bankruptcy. Consistent with a model where uninformed banks compete to refinance the loan granted by a better informed lender, new banks are particularly willing to replace existing banks, if the firm has a good rating or high collateral. These results illustrate the important information advantage gained by banks with long-running lending relationships. However, they also suggest that banks with a long lending history use their information to terminate relationships before default, rather than to provide support for borrowers in financial distress