Bank relationships and the likelihood of filing for reorganization

- The financially distressed firms with strong bank relationships are less likely to file for reorganization.
- Bank relationships significantly influence the duration of a firm's decision on filing for reorganization.
- The bank relationships enhance informational advantages for banks and reduce coordination problems among banks.

This paper examines the effects of bank relationships on the likelihood and duration of the decision to file for reorganization for a sample of Taiwanese firms in default. We find that bank relationships significantly influence the likelihood and duration of a firm's decision on filing for reorganization. Firms with strong bank relationships exhibit significantly decreased likelihood of filing for reorganization and increased length of time needed for making the decision. The findings suggest that in a bank-oriented financial system where banks are the dominant providers of capital, bank relationships better enhance informational advantages for banks and reduce coordination problems among banks, which limits firm filings for costly reorganizations.