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

Abstract

Unlike equity offerings or public debt offerings, bank loan financing elicits a significantly positive announcement return, which has led financial economists to characterize bank loans as special or somehow different from other types of external finance. Here, we find that firms announcing bank loan financing suffer negative abnormal stock returns during the three-year post-announcement period. In the long run, therefore, it appears that bank loans are no different from seasoned equity offerings or public debt issuance. We also find that bank borrowers had operating performance below their peers' a year before their loan announcement, and that their performance does not improve in the subsequent three years. Finally, we document a reduction in earnings transparency following bank loan announcements. These findings are inconsistent with the notion that bank loans mitigate asymmetric information problems of the borrower.