“…We address 49 We acknowledge that there are at least two alternative channels as to how the secondary loan market in uences loan spreads in addition to the diversi cation e ect described above. First, there is substantial evidence that banks get access to private information when they extend loans to rms (James (1987), Lummer and McConnell (1989), Best and Zhang (1993), and Billett, Flannery, and Gar nkel (1995)). Secondary loan prices reveal information about the rm to investors and may lead to a reduction in the cost of debt (information e ect), for example, by reducing the information premium demanded by banks or by reducing the informational advantage of relationship banks (Rajan (1992)).…”
In this paper, we seek to evaluate the relative costs of debt for private versus comparable publicly traded rms. US studies of this important question have been limited due to the absence of comprehensive nancial data on privately-held rms. However, such data is available in the UK. Consequently, we employ a unique dataset of loans taken out by both types of UK rms with a large array of loan and borrower characteristics. We use propensity scores to match private and public companies and nd that private rms pay, on average, 29 to 42bps higher loan spreads than comparable public rms. These ndings are shown to be highly robust across size, opaqueness, relationships, rm age, ownership structure and, importantly, alternative tests that control for endogeneity (ex-post performance, instrumental variable tests and treatment effects models). Consequently, it appears that being private results in debt costs that are signi cantly higher for private rms than public rms and may mitigate some the previously identi ed bene ts of going private.JEL-Classi cation: G21, G22
“…We address 49 We acknowledge that there are at least two alternative channels as to how the secondary loan market in uences loan spreads in addition to the diversi cation e ect described above. First, there is substantial evidence that banks get access to private information when they extend loans to rms (James (1987), Lummer and McConnell (1989), Best and Zhang (1993), and Billett, Flannery, and Gar nkel (1995)). Secondary loan prices reveal information about the rm to investors and may lead to a reduction in the cost of debt (information e ect), for example, by reducing the information premium demanded by banks or by reducing the informational advantage of relationship banks (Rajan (1992)).…”
In this paper, we seek to evaluate the relative costs of debt for private versus comparable publicly traded rms. US studies of this important question have been limited due to the absence of comprehensive nancial data on privately-held rms. However, such data is available in the UK. Consequently, we employ a unique dataset of loans taken out by both types of UK rms with a large array of loan and borrower characteristics. We use propensity scores to match private and public companies and nd that private rms pay, on average, 29 to 42bps higher loan spreads than comparable public rms. These ndings are shown to be highly robust across size, opaqueness, relationships, rm age, ownership structure and, importantly, alternative tests that control for endogeneity (ex-post performance, instrumental variable tests and treatment effects models). Consequently, it appears that being private results in debt costs that are signi cantly higher for private rms than public rms and may mitigate some the previously identi ed bene ts of going private.JEL-Classi cation: G21, G22
“…3 James (1987) finds a significant positive impact of announcement of bank loan agreements; Lummer and McConnell (1989) document a positive impact of favorable loan renewals while non-renewals are accompanied by negative returns for the borrowers. Billet, Flannery, and Garfinkel (1995) show that the impact of loan announcements is positively related to the quality of the lender. Best and Zhang (1993) document evidence that the stock market reaction is strongest for those borrowers where the quality of Smith (2000) provide a comprehensive review of the past and recent research on the special nature of bank loan financing.…”
This paper examines the information content of the announcement of the sale of a borrower's loan by its bank. A large body of research has documented the positive impact on a firm's stock price around the announcement of formation and renewal of bank lending relationships. In light of these findings it would seem natural that when a bank chooses to sell off its loans, the stock returns of the borrower would be adversely affected. Our paper is the first study to test this hypothesis. We find that the stock returns of these borrowers are significantly negatively impacted on average for the period surrounding the announcement of a loan sale. The post-loan sale period is also marked by a large incidence of bankruptcy filings by the borrowers whose loans are sold. Overall, the evidence supports the hypothesis that the news of a bank loan sale has a negative certification impact, which is validated by the subsequent performance of the firm whose loan is sold. We conduct similar event study tests for those banks that engage in loan sales and find that the stock returns of the selling banks are not significantly impacted on average. Cross-sectional tests reveal that loan sales were made by banks that emphasized trading income and had relatively large Commercial and Industrial loan portfolios. For our sample period, a bank's capital adequacy position did not appear to have a material effect on a bank's decision to sell its loans.
“…Chemmanur and Fulghieri (1994) discovered that firms are happy to pay a higher interest rate on loans from reputable banks in exchange for financial flexibility in the case of financial distress. Billett et al (1995) pointed out that lender reputation is an important factor which could influence the market response to loan announcement. Billett et al (1995) argued since private and public securities are not perfect substitute for firms, lender identity must affect the abnormal returns from firms.…”
Section: Lender Reputationmentioning
confidence: 99%
“…Billett et al (1995) pointed out that lender reputation is an important factor which could influence the market response to loan announcement. Billett et al (1995) argued since private and public securities are not perfect substitute for firms, lender identity must affect the abnormal returns from firms. The authors stated that the borrower could enjoy a higher quality evaluating service and more accurate monitoring from high credit rating lenders.…”
Section: Lender Reputationmentioning
confidence: 99%
“…Bank loan announcements should convey valuable information to the market about the borrower's financial situation, and the market should positively respond to bank loan announcements (Fama, 1985;James, 1987;Lummer and McConnell, 1989;Billett, Flannery and Garfinkel, 1995;Wansley, Elayan and Collins, 1992). Aintablian and Roberts (2000) reported that bank lending is different from non-bank lending (public debt and non-bank private placements) since banks could provide unique monitoring services, and bank loan announcements are associated with positive abnormal returns significantly higher than private placements and public debt.…”
of a thesis submitted in partial fulfillment of the requirements for the Degree of M.C.M
An Empirical Analysis of the Effects of Market Response to Bank Loan Announcements in the Hong Kong Stock Market
Qing ChenThis study will validate several key results from previous studies of bank loan announcement effects by using the data from Hong Kong market following the 1997 Asian crisis. Banks are believed to play a unique role in financial market which could effectively reduce the problem of information asymmetry and moral hazard. Banks could access borrowers' inside information which is not available to other participants.Thus bank loan announcements convey valuable information to the market, and market response of the stock price should be positive. However, because of the significant reform in both financial market and information market, the valuation of bank loan announcement conveyed need to be reconsidered. This study investigates whether banks are still "unique" in the financial market or whether they are like middlemen between borrowers and investors. Data used in this study is collected from the Hong Kong Stock Exchange Index, and a standard event study with the market model is applied in the research to conduct the empirical analysis.The results suggest bank loan announcements are associated with significantly higher positive abnormal returns than non-bank loan announcements. Based on the market model of event study, market response is found to be significantly positive for loan syndication, short maturity loan and borrower's debt ratio, and negatively related to II firm size and loan size. Bank loans with refinancing and capital expenditure and no specific purpose have significantly higher positive abnormal returns, and borrowers with property and industrial industry type have more significant positive abnormal returns compared to other industry type. The findings also suggest the Hong Kong stock market is efficient in both strong and semi-strong form for bank loan announcements. A strong evidence of information leakage problem is found for nonbank loan announcements. The results are generally consistent with the existing literature.Key Words: bank loan announcements, abnormal returns, information asymmetry, syndication, loan size, loan maturity, loan purpose, firm size, industry type, debt ratio, market efficiency.
III
ACKNOWLEDGEMENTS
scite is a Brooklyn-based organization that helps researchers better discover and understand research articles through Smart Citations鈥揷itations that display the context of the citation and describe whether the article provides supporting or contrasting evidence. scite is used by students and researchers from around the world and is funded in part by the National Science Foundation and the National Institute on Drug Abuse of the National Institutes of Health.