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Lead bank quality and adverse rating announcements

Author

Listed:
  • Wei-Huei Hsu
  • Abdullah Mamun
  • Lawrence C. Rose

Abstract

Purpose - This paper seeks to examine whether the market values the monitoring activity undertaken by a quality bank in the presence of a credit rating agency. Specifically, the question is asked whether the quality of a lead lending bank influences a market reaction to adverse rating announcements concerning its borrowers. Design/methodology/approach - The event study methodology and various bank quality proxies (size, growth rate in assets, profitability, capital ratio, bank's credit rating, and ownership) are used to examine the market reaction when a borrower's bank loan rating is placed with negative implication or is downgraded. Findings - Firms which are certified and monitored by high-quality banks are less susceptible to negative market reactions when adverse rating announcements are made. Originality/value - The findings indicate high-quality lending banks sustain investors' confidence in their borrowers in the face of deteriorating news. The paper argues that investors and borrowers value monitoring from a high-quality bank, which is an implication of a bank having access to private information about its borrowers.

Suggested Citation

  • Wei-Huei Hsu & Abdullah Mamun & Lawrence C. Rose, 2010. "Lead bank quality and adverse rating announcements," Studies in Economics and Finance, Emerald Group Publishing, vol. 27(4), pages 340-357, October.
  • Handle: RePEc:eme:sefpps:v:27:y:2010:i:4:p:340-357
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    References listed on IDEAS

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    Keywords

    Banks; Credit rating; Banking; Quality;

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