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Debt Forgiveness And Stock Price Reaction Of Lending Banks: Theory And Evidence From Japan

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  • Nobuyuki Isagawa
  • Satoru Yamaguchi
  • Tadayasu Yamashita

Abstract

We provide a simple model for analyzing how debt forgiveness affects the stock price of a lending bank. Our model shows that although debt forgiveness increases shareholder wealth of a bank in healthy financial condition, it decreases shareholder wealth of a bank in unhealthy financial condition. We empirically investigate the announcement effect of debt forgiveness on bank stock prices in Japanese markets. On average, lending banks experience a significant negative announcement effect with respect to debt forgiveness. Consistent with the prediction of the model, we find a negative relation between the announcement effect and the net bad loan ratio as a proxy of the unhealthiness of the financial condition of the bank.

Suggested Citation

  • Nobuyuki Isagawa & Satoru Yamaguchi & Tadayasu Yamashita, 2010. "Debt Forgiveness And Stock Price Reaction Of Lending Banks: Theory And Evidence From Japan," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 33(3), pages 267-287, September.
    • Handle: RePEc:bla:jfnres:v:33:y:2010:i:3:p:267-287
    DOI: 10.1111/j.1475-6803.2010.01271.x
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    References listed on IDEAS

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