9th Symposium on Finance, Banking, and Insurance
Universität Karlsruhe (TH), Germany, December 11 - 13, 2002

Abstract

Distressed Relationships:
Lessons from the Norwegian Banking Crisis (1988­1991)

Steven Ongena
Norwegian School of Management (BI)
David C. Smith
University of Florida and Norwegian School of Management (BI)
Dag Michalsen
Norwegian School of Management (BI)

This paper seeks to measure the magnitude of the effect of bank distress on the loss of relationship benefits. We use the near­collapse of the Norwegian banking system during the period 1988 to 1991 to measure the impact of bank distress announcements on the stock prices of firms maintaining a relationship with a distressed bank. We find that although banks experience large and permanent downward revisions in their equity value during the event period, firms maintaining relationships with these banks face only small and temporary changes, on average, in stock price. We analyze the cross­ sectional variation in firm abnormal returns and find that firms that maintain relatively long relationships suffer more upon announcement of bank distress.