Abstract
This study examines empirically the bank stocks price reactions to loan announcements. Using a sample of 1,354 announcements of loans made by 119 banks located in 35 countries during the period 1998-2006, we find significant abnormal bank stock returns on the days surrounding a bank loan announcement. Positive reactions are greater and more frequent in countries with high private monitoring, while negative reactions are lower and more frequent when the private monitoring is low. Our evidence supports the idea that more regulations promoting the private monitoring of banks improve the quality of market signals, and induce the pursuing of sound lending practices on the part of banks’ managers. Additional evidence shows that the private monitoring of banks is especially important to market reactions to loan announcements in countries with low enforced legal systems, poorly developed stock markets, low concentrated bank industry, and strong official bank supervision.
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