Bank market power and corporate stock price crash risk: borrowers’ manipulation incentives

Using syndicated loan data to match borrowers and lenders, we document a positive and robust effect of bank market power on the two-year-ahead corporate stock price crash risk. Further analysis reveals that powerful banks tend to issue loans with more financial covenants, after controlling for bank-, firm-, and loan-level characteristics. Firms borrowing from powerful banks engage more in real activities manipulation. These findings support the manipulation-incentive channel, providing evidence that borrowers have stronger incentives to manipulate financial information and conceal bad news when lenders possess greater market power and rely more on hard information for monitoring. Our results challenge the common perception that powerful banks are more effective at screening, monitoring, and controlling borrowers. The impact of bank market power on corporate stock price crash risk is stronger for firms with greater demand for external finance and a higher likelihood of covenant violation. Banks can, however, mitigate the adverse effect by lending to geographically closer borrowers and by structuring loan syndicates with higher lender concentration, which are often associated with more frequent soft-monitoring activities. Overall, these findings enhance our understanding of the role of creditors and loan contracts in shaping corporate stock price crash risk and the stability of non-financial sectors.