Bank loan announcements and borrower stock returns: does bank origin matter?
AbstractBanks play a special role as providers of informative signals about the quality and value of their borrowers. Such signals, however, may have a quality of their own as the banks’ selection and monitoring abilities may differ. Using an event study methodology, we study the importance of the geographical origin and organization of the banks for the investors’ assessments of firms’ credit quality and economic worth following loan announcements. Our sample comprises 986 announcements of bank loans to U.S. firms over the period of 1980- 2003. We find that investors react positively to such announcements if the loans are made by foreign or local banks, but not if the loans are made by banks that are located outside the firm’s headquarters state. Investor reaction is, in fact, the largest when the bank is foreign. Our evidence suggest that investors value relationships with more competitive and skilled banks rather than banks that have easier access to private information about the firms. These results are applicable also to the European markets where regulatory and economic borders do not coincide and bank identities and reputation seem to matter a great deal. JEL Classification: G21, G32, H11, D80
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Bibliographic InfoPaper provided by European Central Bank in its series Working Paper Series with number 1023.
Date of creation: Mar 2009
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Find related papers by JEL classification:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
- D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-08-08 (All new papers)
- NEP-BAN-2009-08-08 (Banking)
- NEP-CTA-2009-08-08 (Contract Theory & Applications)
- NEP-FMK-2009-08-08 (Financial Markets)
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