Abstract:Previous research demonstrates that a firm's common stock price tends to fall when it issues new public securities. By contrast, commercial bank loans elicit significantly positive borrower returns. This article investigates whether the lender's identity influences the market's reaction to a loan announcement. Although we find no significant difference between the market's response to bank and nonbank loans, we do find that lenders with a higher credit rating are associated with larger abnormal borrower return… Show more
“…In this section, we examine whether there is evidence consistent with such a reduction in bank specialness as a result of loan trading. Prior studies, such as James (1987), Lummer and McConnell (1989), Best and Zhang (1993), and Billett, Flannery, and Garfinkel (1995), find a robust positive impact of bank loan announcements on borrowers' stock returns at the time of loan origination, which is in contrast to an insignificant or negative response by investors to announcements of most other forms of new financing. 21 However, these prior studies use data from the 1970s and 1980s, a time period during which a well-developed secondary market for loans did not exist.…”
Section: Traditional Bank Specialness and Loan Tradingmentioning
confidence: 91%
“…The 25th percentile and the 75th percentile of the distribution of CARs are also shown in this To assess the economic significance of our results, we compare these estimates with those from other studies on bank specialness, such as Billett, Flannery, and Garfinkel (1995) and Best and Zhang (1993). Our day 0 abnormal stock return of 0.82% in Table I is larger than the 0.68% day 0 loan announcement effect reported by Billett, Flannery, and Garfinkel (1995) in their Table I. Our two-day cumulative abnormal stock return of 1.24% is almost four times the 0.32% loan announcement effect documented by Best and Zhang (1993).…”
Section: Distribution Of Cumulative Abnormal Stock Returns Surroundinmentioning
confidence: 98%
“…From a long-term perspective, any loss in monitoring incentives due to the secondary market trading of loans could lead to a reduction in traditional aspects of bank specialness, and its beneficial effects on borrower's shareholders. Prior studies, such as James (1987), Lummer and McConnell (1989), Best and Zhang (1993), and Billett, Flannery, and Garfinkel (1995), find a robust favorable impact of new bank loan announcements on borrowers' stock returns. However, these prior studies use data from the 1970s and 1980s, a time period during which a well-developed secondary market for loans did not exist.…”
Secondary market trading in loans elicits a significant positive stock price response by a borrowing firm's equity investors. We find the major reason for this response is the alleviation of borrowing firms’ financial constraints. We also find that new loan announcements are associated with a positive stock price effect even when prior loans made to the same borrower already trade on the secondary market. We conclude that the special role of banks has changed due to their ability to create an active secondary loan market while simultaneously maintaining their traditional role as information producers.
“…In this section, we examine whether there is evidence consistent with such a reduction in bank specialness as a result of loan trading. Prior studies, such as James (1987), Lummer and McConnell (1989), Best and Zhang (1993), and Billett, Flannery, and Garfinkel (1995), find a robust positive impact of bank loan announcements on borrowers' stock returns at the time of loan origination, which is in contrast to an insignificant or negative response by investors to announcements of most other forms of new financing. 21 However, these prior studies use data from the 1970s and 1980s, a time period during which a well-developed secondary market for loans did not exist.…”
Section: Traditional Bank Specialness and Loan Tradingmentioning
confidence: 91%
“…The 25th percentile and the 75th percentile of the distribution of CARs are also shown in this To assess the economic significance of our results, we compare these estimates with those from other studies on bank specialness, such as Billett, Flannery, and Garfinkel (1995) and Best and Zhang (1993). Our day 0 abnormal stock return of 0.82% in Table I is larger than the 0.68% day 0 loan announcement effect reported by Billett, Flannery, and Garfinkel (1995) in their Table I. Our two-day cumulative abnormal stock return of 1.24% is almost four times the 0.32% loan announcement effect documented by Best and Zhang (1993).…”
Section: Distribution Of Cumulative Abnormal Stock Returns Surroundinmentioning
confidence: 98%
“…From a long-term perspective, any loss in monitoring incentives due to the secondary market trading of loans could lead to a reduction in traditional aspects of bank specialness, and its beneficial effects on borrower's shareholders. Prior studies, such as James (1987), Lummer and McConnell (1989), Best and Zhang (1993), and Billett, Flannery, and Garfinkel (1995), find a robust favorable impact of new bank loan announcements on borrowers' stock returns. However, these prior studies use data from the 1970s and 1980s, a time period during which a well-developed secondary market for loans did not exist.…”
Secondary market trading in loans elicits a significant positive stock price response by a borrowing firm's equity investors. We find the major reason for this response is the alleviation of borrowing firms’ financial constraints. We also find that new loan announcements are associated with a positive stock price effect even when prior loans made to the same borrower already trade on the secondary market. We conclude that the special role of banks has changed due to their ability to create an active secondary loan market while simultaneously maintaining their traditional role as information producers.
“…James and Weir (1990), and Slovin and Young (1990) conclude that if firms have bank lending relationship, initial public offerings (IPOs) will be less underpriced than IPOs for others. Billett et al (1995) explore the relationship between lender quality and loan announcement -day return. They find that if firm borrows from the higher quality lender, loans are associated with positive and statistically significant price reaction.…”
Section: Literature Review Of Banking Relationship and Firm Performancementioning
The objective of this paper is to examine how banking relationship influences on performance of public listed firms in Vietnam. With a sample of 465 companies listed in Vietnam observed in period 2007 -2010 and using regression method, the research finds that firm performance decreases as the number of bank relationships increases. If a firm establishes strongly short-term credit financing relationship with banks, the firm's performance reduces. On the contrary, if a firm has strongly long-term credit financing relationship with banks, its performance increases. The effectiveness of using total assets is worse as a firm has strongly overall credit financing relationship with banks. Additionally, the study also indicates that asset tangibility structure has negative relationship with firm's ROE, while assets have negative association with ROA. Turnover has positive association with firm performance. Finally, firms with higher state shares have less effective than ones with lower state shares.
“…See Mikkelson and Partch (), James (), Mikkelson and Partch (1986), Lummer and McConnell (), Best and Zhang (), Billett et al (), Maskara and Mullineaux (2011), and Ross (2010); and for surveys see James and Smith ().…”
We consider how funding from informed investors such as banks certifies the quality of the recipient firms to investors uninformed of it. We show that informed finance leads to full separation of firms' quality types, with a larger quantity of it certifying a better quality. Moreover, the increase in the market value of the recipient firm is a convex, increasing function of the quantity of informed finance that it obtains. Lastly, firms with attribute X derive a greater value from the certification service of informed finance than those without it if the distribution of firms' quality conditional on X is secondorder stochastically dominated by that conditional on its absence. The informed finance could be commercial bank loans or the purchase of a firm's equity preceding its IPO by renowned investment banks.
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