BANK FINANCING AND FIRM VALUATION

Abstract

THE CENTRAL QUESTION THIS PAPER INVESTIGATES IS WHETHER BANK LOAN IS A SPECIAL FORM OF DEBT. BANK FINANCING REDUCES INFORMATION FRICTION AND HAS SEVERAL OTHER CONTRACTUAL BENEFITS FOR THE BORROWING FIRMS. THERE IS ALSO A COST TO THIS RELATIONSHIP, WHICH IS THE HOLD-UP PROBLEM. WITH HOLD-UP, BANKS CAN CHARGE A NON-COMPETITIVE RATE TO A BORROWER. WITH A LARGE AND COMPREHENSIVE BANK LOAN SAMPLE, I INVESTIGATE THE EFFECTS OF BANK FINANCING ON FIRM VALUATION REPRESENTED BY TOBIN?S Q, WITH THESE BENEFITS AND COSTS IN MIND. I FIND THAT, IN AGGREGATE, BANK FINANCING HAS A POSITIVE EFFECT ON FIRM VALUATION, EVEN AFTER CONTROLLING FOR DEBTS IN THE CAPITAL STRUCTURE, AND THE ENDOGENEITY OF BANK FINANCING. CROSS-SECTIONALLY, OPAQUE FIRMS AND FIRMS WITH FINANCING CONSTRAINTS HAVE LOWER VALUATION WHEN THEY HAVE OUTSTANDING BANK LOANS, PROVIDING SUPPORT FOR THE HOLD-UP STORY. I ALSO TEST THE CHANNEL OF THE EFFECT OF BANK LOAN BY INVESTIGATING BANK LOAN AVAILABILITY VS. BANK LOAN USAGE.