Capital market reactions to project finance loans

Abstract

Theory predicts that bank loan announcements could increase share prices of loan recipients through a certification effect. We provide complementary evidence using the novel market setting of project finance loans. Since the loans are off-balance-sheet, there should be no certification effect. Applying an event study methodology and the Carhart 4-factor model to a large international dataset, we find that project sponsors do not experience positive abnormal returns after announcements, but lenders do. We also find that sponsors and lenders tend to experience greater equity return volatility after announcements.