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Banks and Bonds: The Impact of Bank Loan Announcements on Bond and Equity Prices

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  • Steven Ongena
  • Viorel Roşcovan
  • Wei-Ling Song
  • Bas J.M. Werker

Abstract

We study the effect of bank loan announcements on the borrowing firms' bond and equity prices. Our sample consists of 896 loan deals signed between 1997 to 2003 involving 364 different US firms. Wereport the first comprehensive evidence that also firm bond prices react to bank loan announcements. Using a two-day event window, we find significant abnormal bond credit spreads reduction of 11 basispoint spread (BPS) on average. The corresponding average stock price reaction is 26 BPS. While stock returns are unaffected by firm risk, bondholders of riskier firms are more sensitive to the loss given default which increases with bank borrowing. Such firms experience bond credit spread increases. Our analysis also provides an estimate of the net impact on firm value of bank loan announcements, between -5 BPS for riskier and smaller firms and 18 BPS for safer and larger companies. Collectively, the results indicate that the overall positive effect on equity value comes from two sources. First, bank certification reduces information asymmetry. Second, there is a transfer of bondholder's wealth to the shareholders as a resultof claim dilution.

Suggested Citation

  • Steven Ongena & Viorel Roşcovan & Wei-Ling Song & Bas J.M. Werker, 2014. "Banks and Bonds: The Impact of Bank Loan Announcements on Bond and Equity Prices," Journal of Financial Management, Markets and Institutions, Società editrice il Mulino, issue 2, pages 131-156, December.
    • Handle: RePEc:mul:jdp901:doi:10.12831/78756:y:2014:i:2:p:131-156
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    2. Khairul Kabir Sumon & Md. Sazib Miyan, 2021. "Responses of Stock Price to the Public Announcement of Forms of Borrowing," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 13(10), pages 169-169, September.
    3. Berlin, Mitchell & Nini, Greg & Yu, Edison G., 2020. "Concentration of control rights in leveraged loan syndicates," Journal of Financial Economics, Elsevier, vol. 137(1), pages 249-271.
    4. Ambrocio, Gene & Hasan, Iftekhar, 2018. "Private information and lender discretion across time and institutions," Bank of Finland Research Discussion Papers 17/2018, Bank of Finland.
    5. Ambrocio, Gene & Hasan, Iftekhar, 2018. "Private information and lender discretion across time and institutions," Research Discussion Papers 17/2018, Bank of Finland.
    6. Li, Chunshuo & Ongena, Steven, 2015. "Bank loan announcements and borrower stock returns before and during the recent financial crisis," Journal of Financial Stability, Elsevier, vol. 21(C), pages 1-12.
    7. Ambrocio, Gene & Hasan, Iftekhar, 2019. "What drives discretion in bank lending? Some evidence and a link to private information," Journal of Banking & Finance, Elsevier, vol. 106(C), pages 323-340.
    8. He, Qing & Lu, Liping & Ongena, Steven, 2015. "Who gains from credit granted between firms? Evidence from inter-corporate loan announcements made in China," BOFIT Discussion Papers 1/2015, Bank of Finland Institute for Emerging Economies (BOFIT).

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    More about this item

    Keywords

    Asymmetric Information; Credit Markets; Loans; Bonds; Credit Spreads; JEL Codes: G14; G21; G24;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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