Hostname: page-component-586b7cd67f-dsjbd Total loading time: 0 Render date: 2024-11-30T17:07:42.771Z Has data issue: false hasContentIssue false
  • English
  • Français

Are Bank Loans Special? Evidence on the Post-Announcement Performance of Bank Borrowers

Published online by Cambridge University Press:  06 April 2009

Matthew T. Billett ,
Mark J. Flannery  and
Jon A. Garfinkel
Matthew T. Billett
Affiliation:
[email protected], University of Iowa, Tippie College of Business, Iowa City, IA 52242
Mark J. Flannery
Affiliation:
[email protected], University of Iowa, Tippie College of Business, Iowa City, IA 52242
Jon A. Garfinkel
Affiliation:
[email protected], University of Florida, Warrington College of Business Administration, Box 117168, Gainesville, FL 32611.
Get access Rights & Permissions [Opens in a new window]

Abstract

Unlike seasoned equity or public debt offerings, bank loan financing elicits a significantly positive announcement return, which has led financial economists to characterize bank loans as “special.” Here, we find that firms announcing bank loans suffer negative abnormal stock returns over the subsequent three years. In the long run, bank loans appear no different from seasoned equity offerings or public debt issues. Our evidence suggests that larger loans (relative to borrower equity) are followed by worse stock performance. We also find that lender protection is negatively related to borrower performance, suggesting the lender is somewhat shielded from the poor performance.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 41 , Issue 4 , December 2006 , pp. 733 - 751
Copyright
Copyright © School of Business Administration, University of Washington 2006

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Asquith, P., and Mullins, D. Jr “Equity Issues and Offering Dilution.” Journal of Financial Economics, 15 (1986), 61–89.CrossRefGoogle Scholar
Barber, B., and Lyon, J.. “Detecting Long-Run Abnormal Stock Returns: The Empirical Power and Specification of Test Statistics.” Journal of Financial Economics, 43 (1997), 341–372.CrossRefGoogle Scholar
Berlin, M., and Loeys, J.. “Bond Covenants and Delegated Monitoring.” Journal of Finance, 43 (1988), 397–412.CrossRefGoogle Scholar
Bernanke, B. “Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression.” American Economic Review, 73 (1983), 257–276.Google Scholar
Bernard, V. L., and Thomas, J. K.. “Post-Earnings Announcement Drift-Delayed Price Response or Risk Premium?” Journal of Accounting Research, 27 (1989), 1–36.CrossRefGoogle Scholar
Billett, M.; Flannery, M.; and Garfinkel, J.. “The Effect of Lender Identity on a Borrowing Firm's Equity Return.” Journal of Finance, 50 (1995), 699–718.CrossRefGoogle Scholar
Boot, A. “Relationship Banking: What DoWe Know?” Journal of Financial Intermediation, 9 (2000), 7–25.CrossRefGoogle Scholar
Dierkens, N. “Information Asymmetry and Equity Issues.” Journal of Financial and Quantitative Analysis, 26 (1991), 181–199.CrossRefGoogle Scholar
Eckbo, E. “Valuation Effects of Corporate Debt Offerings.” Journal of Financial Economics, 15 (1986), 119–152.CrossRefGoogle Scholar
Fama, E. ’What's Different About Banks?” Journal of Monetary Economics, 15 (1985), 29–39.CrossRefGoogle Scholar
Fama, E. “Market Efficiency, Long-Term Returns, and Behavioral Finance.” Journal of Financial Economics, 49 (1998), 283–306.CrossRefGoogle Scholar
Fama, E., and French, K.. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 3–56.CrossRefGoogle Scholar
Hertzel, M.; Lemmon, M.; Linck, J.; and Rees, L.. “Long-Run Performance Following Private Placements of Equity.” Journal of Finance, 57 (2002), 2595–2617.CrossRefGoogle Scholar
Howton, S. D.; Howton, S. W.; and Perfect, S. B.. “The Market Reaction to Straight Debt Issues: The Effects of Free Cash Flow.” Journal of Financial Research, 21 (1998), 219–228.CrossRefGoogle Scholar
James, C. “Some Evidence on the Uniqueness of Bank Loans.” Journal of Financial Economics, 19 (1987), 217–236.CrossRefGoogle Scholar
Jung, K. Y.; Kim, Y. C.; and Stulz, R. M.. “Timing, Investment Opportunities, Managerial Discretion, and the Security Issue Decision.” Journal of Financial Economics, 42 (1996), 159–185.CrossRefGoogle Scholar
Kothari, S., and Warner, J.. “Measuring Long-Horizon Security Price Performance.” Journal of Financial Economics, 43 (1997), 301–340.CrossRefGoogle Scholar
Krishnamurthy, S.; Spindt, P.; Subramaniam, V.; and Woidtke, T.. “Does Investor Identity Matter in Equity Issues: Evidence From Private Placements.” Journal of Financial Intermediation, 14 (2005), 210–238.CrossRefGoogle Scholar
Krishnaswami, S., and Subramaniam, V.. “Information Asymmetry, Valuation, and the Corporate Spin-Off Decision.” Journal of Financial Economics, 53 (1999), 73–112.CrossRefGoogle Scholar
Kwan, S., and Carleton, W.. “Financial Contracting and the Choice Between Private Placement and Publicly Offered Bonds.” Federal Reserve Bank of San Francisco Working Paper (1998).Google Scholar
Loughran, T., and Ritter, J.. “The New Issues Puzzle.” Journal of Finance, 50 (1995), 23–51.CrossRefGoogle Scholar
Loughran, T., and Ritter, J.. “The Operating Performance of Firms Conducting Seasoned Equity Offerings.” Journal of Finance, 52 (1997), 1823–1850.CrossRefGoogle Scholar
Lummer, S., and McConnell, J.. “Further Evidence on the Bank Lending Process and the Capital Market Response to Bank Loan Agreements.” Journal of Financial Economics, 25 (1989), 99–122.CrossRefGoogle Scholar
Lyon, J.; Barber, B.; and Tsai, C.. “Improved Methods for Tests of Long-Run Abnormal Stock Returns.” The Journal of Finance, 54 (1999), 165–201.CrossRefGoogle Scholar
Masulis, R., and Korwar, A.. “Seasoned Equity Offerings: An Empirical Investigation.” Journal of Financial Economics, 15 (1986), 91–118.CrossRefGoogle Scholar
Mikkelson, W., and Partch, M.. “Valuation Effects of Security Offerings and the Issuance Process.” Journal of Financial Economics, 15 (1986), 31–60.CrossRefGoogle Scholar
Mitchell, M., and Stafford, E.. “Managerial Decisions and Long-Term Stock Price Performance.” Journal of Business, 73 (2000), 287–329.CrossRefGoogle Scholar
Myers, S., and Majluf, N., “Corporate Financing and Investment Decisions When Firms Have Information That Investors Do Not Have.” Journal of Financial Economics, 13 (1984), 187–221.CrossRefGoogle Scholar
Ongena, S., and Smith, D.. “Bank Relationships: A Review.” In Performance of Financial Institutions, Zenios, S. A. and Harker, P., eds. Cambridge University Press (2000).Google Scholar
Ritter, J. “The Long-Run Performance of IPOs.” Journal of Finance, 46 (1991), 3–28.Google Scholar
Ritter, J. “Investment Banking and Securities Issuance.” In Handbook of the Economics of Finance, Constantinides, G., Harris, M., and Stulz, R., eds. Amsterdam: North Holland (2002).Google Scholar
Spiess, D. Katherine, and Affleck-Graves, J.. “Underperformance in Long-Run Stock Returns Following Seasoned Equity Offerings.” Journal of Financial Economics, 38 (1995), 243–267.CrossRefGoogle Scholar
Spiess, D. Katherine and Affleck-Graves, J.. “The Long-Run Performance of Stock Returns Following Debt Offerings.” Journal of Financial Economics, 54 (1999), 45–73.CrossRefGoogle Scholar
Titman, S.; Wei, K. C.; and Xie, F.. “Capital Investments and Stock Returns.” Journal of Financial and Quantitative Analysis, 39 (2004), 677–700.CrossRefGoogle Scholar
Vijh, A. “Long Term Returns From Equity Carveouts.” Journal of Financial Economics, 51 (1999), 273–308.CrossRefGoogle Scholar
White, H. “A Heteroskedasticity-Consistent Covariance-Matrix Estimator and a Direct Test for Heteroskedasticity.” Econometrica, 48 (1980), 817–838.CrossRefGoogle Scholar