The Value of Bank Durability: Borrowers as Bank Stakeholders

Authors

  • MYRON B. SLOVIN,

  • MARIE E. SUSHKA,

  • JOHN A. POLONCHEK

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    • The authors are from, respectively, Department of Finance, Louisiana State University, Department of Finance, Arizona State University, and Department of Finance, Oklahoma State University. We acknowledge valuable suggestions from an anonymous referee, an anonymous associate editor, and René Stulz (the editor).

ABSTRACT

We examine the value of bank durability to borrowing firms. The analysis is based on theoretical models of the asset services view of intermediation which imply that private information and associated relationship-specific activities are intrinsic to bank lending. We analyze share price effects on firms with lending relationships with Continental Illinois Bank during its de facto failure and subsequent FDIC rescue. We find the bank's impending insolvency had negative effects and the FDIC rescue positive effects on client firm share prices. We conclude that borrowers incur significant costs in response to unanticipated reductions in bank durability and thus are bank stakeholders.

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