| dc.description.abstract | This dissertation is a collection of three essays that investigate the role and importance of intermediaries in corporate finance and financial markets. Chapter 1 investigates whether bond rating agencies convey new information when they announce a rating change by studying the corporate bond market reaction to rating change announcements. Abnormal bond returns over a two-day event window that includes the downgrade (upgrade) are negative (positive) and statistically significant, although the reaction to upgrades is economically small. The bond market response is stronger for rating changes that appear more surprising, rating changes of lower rated firms, and upgrades that move the firm from speculative grade to investment grade. These findings support the hypothesis that both rating upgrades and downgrades convey some new information. Chapter 2 examines the long-standing question of whether firms derive value from investment banking relationships by studying how the bankruptcy of Lehman Brothers affected industrial firms that received underwriting, advisory, analyst, and market-making services from Lehman. Equity underwriting clients experienced an abnormal stock return of around -5%, on average, in the seven days surrounding Lehman's bankruptcy, amounting to $23 billion in aggregate, risk-adjusted losses. Losses were especially severe for companies that had stronger and broader security underwriting relationships with Lehman or were smaller, younger, and more financially constrained. All other client groups were not adversely affected, on average. These results are consistent with the hypothesis that equity underwriting relationships are valuable to client firms and costly to replace. Chapter 3 examines the question of whether firms derive value from lending relationships by studying how the bankruptcy of Lehman Brothers affected corporate borrowers that had syndicated loans from Lehman. Firms with syndicated credit facilities from Lehman experienced abnormal stock returns of -3%, on average, during a seven day period that includes the bankruptcy announcement. These losses were more severe if Lehman was the firm's lead lender or if Lehman recently underwrote the firm's equity securities. Firms with more severe information asymmetry and moral hazard problems, less profitable firms, and firms with less cash and larger undrawn credit lines from Lehman also suffered greater losses. Lehman's borrowers also experienced significant reductions in profitability and investment relative to their industry peers in the year following Lehman' failure. These findings are consistent with the hypothesis that lending relationships developed through syndicated loans are valuable to corporate borrowers and costly to replace. | |
