The Effect of Lender Identity on a Borrowing Firm's Equity Return

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 returns. This evidence complements earlier findings that an auditor's or investment banker's perceived “quality” signals valuable information about firm value to uninformed market investors.

Are Banks Still Special When There Is a Secondary Market for Loans?

“…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.…”

“…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).…”

“…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.…”

The Effect of Banking Relationship on Firm Performance in Vietnam

“…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.…”

Put Your Money Where Your Mouth Is: A Model of Certification with Informed Finance

“…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 ().…”