Loan Announcements Research Articles

Related guarantee and implicit tunneling

This paper shows related guarantees increase corporate tunneling. The effect is more pronounce for firms with smaller size, higher liabilities, and poorer profitability. Implicit tunneling has a significant effect on the mechanism of tunneling and bank financing. However, individual tunneling shows a smaller and shorter term effect. Furthermore, economic development, time variant economic freedom, regional economic development, business-government relationship and government intervention are all significant variables that can explain variations in the magnitude of tunneling. Our results are robust in that we provide two Instrumental Variables that can further predict frauds of “unrelated” loans, implicit related transactions and textual analysis on corporate loan announcements.

Public Firm Borrowers of the US Paycheck Protection Program

We document that nearly half of public firms were eligible for the Paycheck Protection Program (PPP), with 30.3% of those eligible choosing to borrow. Consistent with the program's objectives, borrowers tended to be smaller, have less cash, have higher leverage, and fewer investment opportunities. In addition, they faced negative profits in the second quarter of 2020 and their firm values declined upon PPP loan announcement. We further document that 17.7% of PPP borrowers, in particular the healthier firms, returned their loan after public backlash. Overall, concerns of reputational harm from public disclosure appeared to prevent eligible firms from availing emergency government funding.

Three types of fear play market uncertainty: evidence from bank loan

ABSTRACT This research investigates whether the market sentiment influences firm stock returns with bank loan announcements. We find that CBOE Volatility Index (VIX) is positively related to cumulative abnormal returns, confirming VIX reflects the effect of loan announcements on the financial market. Results show that Financial and Economic Attitudes Revealed by Search (FEARS25) index without predictive power. Instead of that, the daily change of searching VIX (SVIX) of individual investors significantly capture the negative abnormal return before the loan announcements and cease as loan announcements occur. Our findings support that not only professional investors but also individual investors search on Google consider bank loan announcement as good news for borrowers.

Prime (information) brokerage

We show that hedge funds gain an information advantage from their prime broker banks regarding the banks’ corporate borrowers. The connected hedge funds make abnormally large trades in the stocks of borrowing firms prior to loan announcements, and these trades outperform other trades. The outperformance is particularly strong for trades of hedge funds that have high revenue potential for prime broker banks. These informed trades appear to be based on information not just about the loan itself but also about firms’ fundamentals such as future earnings. Finally, we find evidence suggesting that equity analysts inside the banks are one potential conduit of information transfer.

Bank Loan Announcement Effects — Evidence from a Comprehensive 8-K Sample

Using a comprehensive sample of over 10,000 bank loan announcements, we find results that differ from the findings of Maskara and Mullineaux (JFE 2011) and also that of Fields et al (JMCB 2006), which indicated that announcement effect of bank loans on borrower stocks disappeared as of late. We find bank loan announcements still have significant impact on borrowing firms' equity prices in our large sample, and our results are in-line with the findings of Billet et al (JF 1995), which was disputed by subsequent papers. Furthermore, we find that firms with lower abnormal spreads relative to the KMV-Merton default-risk model have higher announcements returns, an effect which is more pronounced for smaller firms. We also document that stock price run-up prior to bank loan announcements was quite significant in the early sample period but largely disappeared after the Dodd-Frank Act, indicating information leakage was effectively prevented.

Related Guarantee and Implicit Tunneling

This paper shows related guarantees increase corporate tunneling. The effect is more pronounce for firms with smaller size, higher liabilities, and poorer profitability. Implicit tunneling has a significant effect on the mechanism of tunneling and bank financing. However, individual tunneling shows a smaller and shorter term effect. Furthermore, economic development, time variant economic freedom, regional economic development, business-government relationship and government intervention are all significant variables that can explain variations in the magnitude of tunneling. Our results are robust in that we provide two Instrumental Variables that can further predict frauds of “unrelated” loans, implicit related transactions and textual analysis on corporate loan announcements.

Initial bank loans, zero-leverage firms and stock market liquidity

PurposeThe purpose of this paper is to examine stock market reactions and liquidity effects following the first bank loan announcement of zero-leverage firms.Design/methodology/approachThe authors use an event studies methodology in both a univariate and multivariate framework. The authors also use regression analysis.FindingsUsing a sample of 96 zero-leverage firms listed on the FTSE 350 index over the time period of 2000–2015, the authors find evidence of a significant and permanent stock price increase as a result of the initial debt announcement. The loan announcement results in a sustained increase in trading volume and liquidity. This improvement continues to persist once the authors control for stock price and trading volume effects in both the short and long run. Furthermore, the authors examine the spread decomposition around the same period, and discover the adverse selection of the bid–ask spread is significantly related to the initial bank loan announcement.Research limitations/implicationsThe results can be attributed to the information cost/liquidity hypothesis, suggesting that investors demand a lower premium for trading stocks with more available information.Originality/valueThis is the first paper to look at multiple industries, more than one loan and information asymmetry effects.

Market response to syndicated loan announcements from high‐profile failed and acquiring banks during the global financial crisis

AbstractPrevious studies that have examined the impact of the 2008 financial crisis on syndicated loans have ignored potential differences between lending banks by explicitly or implicitly aggregating all lenders together and focusing on borrower characteristics. One must jointly consider both borrower and lender to fully understand the complex role of the syndicate during this period. We consider the identity of the lender, with a focus on five major US banks that failed and their five corresponding acquirers. Our results highlight the distinct roles of investment and commercial banks and facilitate an understanding of relationship and transactional‐based lending.

The price behavior around initial loan announcements: Evidence from zero-leverage firms in the UK

This paper analyses price effects of trades around the initial loan announcements for 96 zero-leverage firms listed on the FTSE 350 index over the time of period 2000–2015. Using a very large sample size of 28 million share purchases and 26 million share sales, we discover price continuations follow buys and reversals follow sales. We also observe that purchases have a greater impact on permanent price changes. Once price effects are estimated using quote returns to eliminate the bid-ask bias, the asymmetry in buyer and seller initiated trades is dramatically reduced. Our results suggest that the bid-ask bounce can explain asymmetry in the trading direction of zero-leverage firms when they encounter debt for the first time.

Market Response to Syndicated Loan Announcements During the Global Financial Crisis: Failed vs. Acquiring Banks

We evaluate and compare market reaction to syndicated loan announcements for two sets of high-profile banks, consisting of five banks that failed in 2008 during the financial crisis and the five banks that ultimately acquired them. Results show that loan announcements are viewed differently for the two sets of banks when partitioned on loan type, loan purpose and information asymmetry. In addition to event study analysis we analyze differences in loan attributes and borrower risk characteristics for the two groups. Additional evidence on the impact of the financial crisis is shown by comparing loan announcements for the acquiring banks during pre- versus post-crisis periods. Our findings highlight the importance of the role of the syndicate in supporting the borrowers of failed banks and the timeliness with which the government encouraged the mergers or sale.

Bank loan announcements and religious investors: Empirical evidence from Saudi Arabia

Abstract We study how investors in a conservative Muslim society react to announcements of bank loans depending on their compliance with Shari’a law. We hand-collect 173 announcements of bank loans granted to listed corporations in Saudi Arabia, assess their issuance and estimate the reaction of the borrowing firms‘ stocks. We find that loans that are not Shari’a compliant are larger and are granted to larger firms. Controlling for firm and loan characteristics commonly present in other loan announcement studies, we further document that equity market investors react negatively to non-compliant loan announcements with the two-day cumulative abnormal return preceding the announcement up to 1.8 percentage points lower for the smaller non-compliant loans.

Believers' Premia in the Land of the Two Holy Mosques: On the Impact of Shari'a Compliant Bank Loan Announcements in Saudi Arabia

We study how investors in a conservative Muslim society react to announcements of bank loans depending on their compliance with Shari'a law. We hand-collect 173 announcements of bank loans granted to listed corporations in Saudi Arabia, assess their issuance and estimate the reaction of the borrowing firms' stocks. We find that loans that are not Shari'a compliant are larger and are granted to larger firms. Controlling for firm and loan characteristics commonly present in other loan announcement studies, we further document that equity market investors react negatively to non-compliant loan announcements with the two-day cumulative abnormal return preceding the announcement up to 1.8 percentage points lower for the smaller non-compliant loans.

Evidence on Whether Banks Consider Carbon Risk in Their Lending Decisions

Banks face a dilemma in choosing between maximising profits and facilitating the sustainable use of resources within a carbon-constrained future. This study provides empirical evidence on this dilemma, investigating whether a bank loan announcement for a firm with high carbon risk conveys information to investors about the firm’s carbon risk exposure collected through a bank’s pre-loan screening and ongoing monitoring. We use a sample of 120 bank loan announcements for ASX-listed firms over the period 2009–2015. We measure high (low) carbon risk exposure based on whether firms meet (do not meet) the reporting threshold of the NGER scheme. We document positive and significant excess loan announcement returns for loan renewals for high carbon risk firms, but not for loan initiations. Further, we document a more significant loan announcement return for renewals with favourable term revisions. Finally, we find no evidence that the market differentiates between domestic and foreign lenders. Taken together, our results suggest that investors perceive that banks incorporate carbon risk considerations into their lending decisions. Our results highlight the value of banks as financial intermediaries given the information asymmetry surrounding firms’ carbon risk exposure, and more generally the need to extend modern banking theory to consider issues such as the impact of banks’ CSR reputation on lending decisions.

Prime (Information) Brokerage

We document a channel of information flow from prime brokers to their hedge fund clients. We examine whether hedge funds make informed trades on the stocks of firms to which their prime broker’s affiliated bank initiates a syndicated loan. We find that these connected hedge funds make abnormally large trades prior to a loan announcement, compared to their own trades in other stocks or to the trades in the borrowing firm’s stock by unconnected hedge funds. More importantly, we find that the connected hedge funds’ trades subsequently generate superior performance compared to other trades. The outperformance is highest for trades of connected hedge funds that have high revenue generation potential for their prime brokers, and amounts to 7.2% – 8.7% per annum.

Bank Balance Sheets and the Value of Lending

We study 1,400 UK syndicated loans, together with the financial history of the lead bank and the borrowing firm. We interpret abnormal equity returns around loan announcements as the value of the lending relationship to the firm. We find that: (i) Consistent with previous evidence, the value of lending is higher when the firm is riskier or more opaque, suggesting that it primarily reflects the lead bank’s screening and monitoring activities. (ii) As a bank becomes larger, more profitable or more capitalized, the value of its loans first increases and then decreases. The largest, most capitalised or most profitable banks do not give the most valuable loans. (iii) Firms which receive low-value loans are more likely to experience low profitability and financial distress during the lending relationship. By relating the state of bank balance sheets to borrower performance, we offer a new angle to evaluate the impact of financial conditions on the real economy.

Do Tighter Loan Covenants Signal Improved Future Corporate Results? The Case of Performance Pricing Covenants

Covenants in corporate bonds and loan agreements mitigate agency conflicts between borrowers and lenders and may provide a signal of borrower quality to help resolve information asymmetry. Performance pricing covenants in bank loans specify automatic adjustments to loan spreads based on borrowers’ subsequent performance. Our covenant signaling framework views interest‐decreasing performance pricing as a tight covenant associated with borrowers’ private information on improved future performance accompanied by reduced credit risk. This positive signal is associated with larger positive loan announcement returns and greater improvements in future borrower performance. Further, in addition to signaling value, we find that the spread impact of this class of covenant also depends on its option value and reduction in transaction costs.

The Global Financial Crisis and Stock Market Reaction to Bank Loan Announcements

This study investigates how equity investors react to bank loan announcements in China using an event study methodology. By estimating the average Cumulative Abnormal Returns (CARs) over the event period and controlling for the impact of other factors such as borrower, lender and loan characteristics, we find that the overall reaction is negative. However, the results for the two sub-sample periods are different. After the onset of the Global Financial Crisis, the average CARs are no longer statistically different from zero, indicating higher lending standards and improvement in the quality of credit analysis of Chinese banks.

Bank Lending Decisions and the Value Effect of Loan Announcements: New Evidence from the Sensitivity between Bank Loans and Firm Performance Adjusted for Earnings Management in China

This paper explores the puzzle of inconsistent findings in regard to bank lending decisions and the negative response to bank loan announcements in China. Using firm performance before and after the lending decisions, adjusted for the effects of earnings management, we are able to examine not only whether banks pay attention to borrowers’ reported accounting profitability but also their credibility. We find that, when firm performance is adjusted for the effects of earnings management, in some cases it is no longer related to bank loan size. Specifically, the positive relationship disappears for loans by (state-owned banks) SBs to (state-owned enterprises) SOEs and loans by (small and medium banks) SMBs to both SOEs and non-SOEs, but still holds for loans by (foreign banks) FBs to both SOEs and non-SOEs. In regard to the market reaction to bank loan announcements, we find that negative bank loan announcements occur when the positive relationship between bank loan and firm performance disappears. Our evidence suggests that, in emerging markets, the positive relationship between firm performance and bank loan size is in some cases merely cosmetic and banks do not always exert an effort to screen borrowing firms. Accordingly, without real effort devoted to screening activities, banks lose the certification value on borrowers. Our study complements previous studies that use the sensitivity between firm performance and bank loan size to model bank lending decisions, and reconcile the conflicting evidence from the literature on banks’ informational role and the literature on bank lending decisions.

The Options Market Reaction to Bank Loan Announcements

In this study, we examine the options market reaction to bank loan announcements for the population of US firms with traded options and loan announcements during 1996–2010. We get evidence on a significant options market reaction to bank loan announcements in terms of levels and changes in short-term implied volatility and its term structure, and observe significant decreases in short-term implied volatility, and significant increases in the slope of its term structure as a result of loan announcements. Our findings appear to be more pronounced for firms with more information asymmetry, lower credit ratings and loans with longer maturities and higher spreads. Evidence is consistent with loan announcements providing reassurance for investors in the short-term, however, over longer time horizons, the increase in the TSIV slope indicates that investors become increasingly unsure over the potential risks of loan repayment or uses of the proceeds.

Who Gains from Credit Granted between Firms? Evidence from Inter-Corporate Loan Announcements Made in China

​Who gains from inter-corporate credit? To answer this question we investigate the reactions of the stock prices of both the issuing and receiving firms to the announcements of 719 inter-corporate loans that took place between 2005 and 2012 in China. We find that the average abnormal return for the issuers of inter-corporate loans is significantly negative, whereas the corresponding return for those firms receiving credit is positive. Investors may worry that issuing firms may have run out of other worthwhile projects to finance, while at the same time they may view credit-receiving firms as being certified as worthy borrowers. The issuance of intra-group loans, especially those with higher interest rates, is associated with lower returns overall since such loans may signal a spreading of financial distress to the rest of the group. After issuing inter-corporate loans, firms are also found to have lower accounting performance, which confirms the aforementioned signaling interpretation.