Bank Loan Price Reactions to Corporate Events: Evidence from Traded Syndicated Loans

Abstract

We examine the effect of open market share repurchase announcements on prices of traded loans and find a significant wealth transfer effect; the change in the market value of equity is inversely related to the change in the market value of loans. We find that loan abnormal returns are more negative when the loan contains incurrence covenants (e.g., payout restrictions), and that a combination of incurrence covenants and maintenance covenants significantly attenuates the negative effect of share repurchases on loan prices. We also find evidence of wealth transfers between loans and equity at the announcement of seasoned equity issues.