Banks' lending decisions after loan acquisitions: do banks favour pre-existing relationships?

Abstract

This article examines the lending decisions of Korean banks after they acquire loan portfolios from failed banks. We find that a firm's preexisting relationships positively affect the continuation of those relationships, and that pre-existing relationships negatively impact increases in loan size, once those relationships are maintained. These results suggest that banks have a conflict of interest that comes with pre-existing lending relationships, and that bank quality does not necessarily convey the risk classes of its client firms.