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2005 Documento de Trabajo #206

The Effects on Firm Borrowing Costs of Bank M&As

Over the past few decades, banking systems in both mature and emerging markets have experienced a wave of consolidations, and mergers and acquisitions (M&A). These developments have raised a number of questions among researchers and policy makers. A key concern refers to whether bank mergers benefit or harm borrowers. The goal of this paper is to study the effects on bank clients of these M&A deals, by analyzing their effects on the loan rates paid by a sample of Chilean manufacturing firms over the 1990-98 period. Using a unique data set on credit transactions between banks and their clients, we study whether borrowers’ terms of lending improve or worsen after the merger. Our methodology allows for a heterogeneous response of firms, depending upon the number of alternative funding sources available to them. We also allow for differences in the short- and long-term response of lending rates. Our results show that M&As do affect firms’ borrowing costs, that these effects are long-lasting, and that they critically depend on whether firms have alternative lending sources that guard them from the adverse effects that mergers may convey. These results are consistent with the hypotheses that bank lending is characterized by informational monopolies and other sources of switching costs, and that valuable client-bank relationship information may be lost over the M&A process.

JEL Codes: E51, G21, G32.

Fabián Duarte
Andrea Repetto
Rodrigo O. Valdés

Keywords: Bank M&As; Informational monopolies; Borrower capture.