Loan Signals: How Lenders Influence the Value of M&A Deals
When companies announce mergers and acquisitions, all eyes turn to the CEOs, the stock price, and the strategic fit. But a new study reveals a hidden yet powerful player in this process - the lender.
Bankers Behind the Scenes
When companies announce mergers and acquisitions (M&As), all eyes turn to the CEOs, the stock price, and the strategic fit. But a new study by Nadia Massoud and co-authors reveals a hidden yet powerful player in this process: the lender. Their research shows that banks do far more than just write the check—they play a critical role in determining whether a deal creates value for shareholders.
By analyzing over 6,400 U.S. M&A deals from 1995 to 2015, the team finds that when an acquisition is financed by a new loan—particularly when the lender has no prior ties to the firm—the acquiring company’s stock performs significantly better around the deal announcement. These “loan-financed M&As” outperform others by 1.4 to 2 percentage points, depending on the deal structure. The message is clear: lender involvement, when it involves fresh scrutiny and capital, signals deal quality to the market.
Mining Data to Decode Lending’s Role
To unlock these insights, the authors designed a meticulous two-step textual analysis of SEC filings to identify which M&A deals were truly financed with loans. This novel data-driven approach allowed them to overcome a major roadblock in the literature: reliably tracking how deals are funded.
They further applied rigorous statistical models, including an instrumental variable technique and a quasi-natural experiment (changes in accounting rules that constrained bank lending), to separate the lender’s influence from the acquirer’s. Their findings consistently support the idea that lenders actively screen M&A deals, monitor borrowers post-acquisition, and sometimes prevent bad deals from happening altogether.
One particularly innovative element is the use of a proxy for lender competition—“bank density” near the acquiring firm’s headquarters—which helps isolate the availability of credit from the borrower’s own characteristics. By linking geographic banking data with deal performance, the study adds a sophisticated layer of analytics to traditional finance research.
Four Ways Lenders Add Value
The paper identifies four distinct mechanisms through which lenders enhance M&A outcomes:
- Screening Effect: Banks conduct due diligence before agreeing to finance a deal, and their participation signals quality to the market. This is especially true when the acquirer lacks a prior relationship with the lender.
- Certification of Deal Quality: If the lender also has a history with the target company, it may possess unique information that further validates the deal.
- Bad Deal Prevention: In firms with weak governance, lenders can act as a check against managerial overreach by refusing to fund risky or value-destroying acquisitions.
- Ongoing Monitoring: Longer-term loans incentivize banks to monitor borrower performance post-acquisition, aligning interests between lenders and shareholders.
Each of these channels strengthens the case that lenders are not passive financiers but active agents in corporate governance.
Implications for Executives and Dealmakers
For CFOs, M&A advisors, and board members, this research reframes how to think about funding strategy. The source of acquisition capital is not just a cost consideration—it also carries important signals and governance implications. Securing a new loan for a deal could, in fact, boost market confidence and shareholder value, particularly when the bank involved is known for its rigorous standards.
This also raises a cautionary flag: relying on internal funds or amending existing loans may miss out on the signaling and oversight benefits that come with new external financing. In other words, how a deal is financed is just as important as the deal itself.
