The Effects of Announcements of Bank Lending Agreements on the Market Values of U.S. Banks

Abstract

Banks, by their very nature, specialize in evaluating risky lending situations, and their decisions to grant loans are signals to other providers of capital about the borrowers' financial strength. These other providers can evaluate these signals and can lower their own information generation costs about the borrowers by performing less costly evaluations. They can then provide their services at lower costs. Corporate and other borrowers, by signaling their credit-worthiness through bank borrowing, can lower their credit costs. Surprisingly, there is little evidence to indicate the effects of bank lending agreements on the market values of U.S. bank-holding companies (USBHCs).