Information Asymmetry, Financial Intermediation, and Wealth Effects of Project Finance Loans

Abstract

Using a unique hand-collected sample, we study market reactions to mining developers announcing project finance loans. We document a significant three-day abnormal return of 2.6% and a 3.4% reduction in abnormal bid-ask spread around loan approvals, consistent with information transfer from private lenders to equity holders and reduction in asymmetric information. Cross-sectional analysis reveals a negative association between announcement return and hedging requirements specified in loan contracts, which becomes insignificant after controlling for treatment effects of hedging. Specialist banks do not charge lower rates but are more likely to impose hedging requirements, consistent with rent extraction due to bargaining power. (JEL G30, G32)

Common Stock Returns around Farmout Announcements in the Oil and Gas Industry

“…French Guiana's index mirrors France as the former is part of France's overseas territories. This approach is consistent with Kogut (1991) and Ferguson and Lam (2021).…”

“…18 Farmors relinquish interests in projects located in jurisdictions with an average (median) political risk of 0.81 (0.88). This political risk index is employed due to its broad coverage and has been used by recent studies including Glambosky et al (2015) and Ferguson and Lam (2021). Daily oil price data (WTI) is obtained from the US Energy Information Administration.…”