| This dissertation explores the monitoring roles of private lenders as a corporate control mechanism. Using firms that experience large performance declines between 1997 and 2001, we investigate how close lending relationships influence restructuring actions of borrowing firms in response to their performance shocks. We find that firms with more loans from their durable lending relationships are more likely to engage in downsizing actions, whether they generate immediate cash flows or not. The existence of long-term relationship lenders decreases the likelihood of expansionary actions. The announcement returns of downsizing are also positively related to lending relationship measures such as duration of lending relation and borrowing from lead credit facilities. While firms with more borrowings reduce their loans following downsizing actions, those with long-run lending relationships maintain their loan amount. In addition, firms with close ties to their lenders have better post-restructuring performance and lower probability of being acquired. These findings are consistent with the view that close lending relations create value by facilitating firms to engage in value-increasing restructuring during performance declines. |
