Disrupted Lending Relationship and Borrower's Strategic Default

Using a sample of bank loans to firms operating in the Greek tourism sector, and regional variation of tourism activities to identify the strategic defaulted firms, we examine the impact of bank consolidation on the firms’ payment behavior. We show that a merger-induced impairment of the lending relationship is related to a higher likelihood of strategic default by the target bank’s borrowers. In contrast, mergers with a limited impact on the lending relationship have no effect on the probability of strategic default of target bank’s borrowers. The results highlight the importance of relationship lending benefits in mitigating strategic default risk. Our findings are robust to the alternative interpretation of soft budget constraints.