An Analysis of Syndicated Loan Announcements During the Global Financial Crisis

Abstract

The recent financial crisis presents an opportunity to examine stock market reactions to syndicated loan decisions reached by borrowers and lenders regarding loan type and loan purpose. We find that during the crisis, the renegotiation flexibility provided by revolving credit is positively valued, whereas during the low‐interest‐rate period following the crisis, both revolving and term loans are viewed favorably. We also examine information asymmetry effects and find that after the crisis, low‐creditworthy borrowers generate a positive market response, but during the crisis, high‐creditworthy borrowers are viewed positively and low‐creditworthy borrowers are punished by the market.

The market reaction to syndicated loan announcements before and during the COVID-19 pandemic and the role of corporate governance

“…Our findings are in line with prior literature (i.e. Li and Ongena, 2015 ; Gasbarro et al, 2017 ) suggesting positive excess returns for borrowers during the global financial crisis. Another important finding of our study lies in the investigation of the impact of certain corporate governance mechanisms on borrowers’ gains before and during the crisis.…”

“…They show higher excess returns for borrowers with weak governance structures, suggesting that banks appear to be substitutes for corporate governance, but only for borrowers whose external governance is weak. Gasbarro et al (2017) analyze 8,867 syndicated loan announcements by US firms during the period 2004–2012 and find significant positive abnormal returns for borrowers. The authors further show that credit loans generate value in the pre-crisis (01/2004-07/2007) and crisis periods (08/2007-11/2008), while term loans create value in the post-crisis period only (12/2008-12/2012).…”

“…Also, the research findings only partially support the hypothesis of a positive certification effect upon loan announcement during an economic meltdown. The studies of Gasbarro et al (2017) and Li and Ongena (2015) find that a syndicated loan is considered by the market to be a positive signal during the global financial crisis, while Marshall et al (2019) and Godlewski (2014) suggest that loan origination became less informative for the creditworthiness of borrowers during the crisis period. The ongoing pandemic disrupts the revenue streams of firms, which have to deal with their fixed costs, debt expenses as well as declining cash balances ( Hasan et al, 2020 ).…”