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Third-Party Certification in New Issues of Corporate Tax-Exempt Bonds: Standby Letter of Credit and Bond Rating Interaction

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  • Roger D. Stover

Abstract

This paper expands the commercial bank certification literature by examining the role of banks as issuers of standby letters of credit in the corporate tax-exempt debt market. While considerable evidence for such a role is observed in the equity markets, little has been done to focus on the debt markets. The certification influence of the bank is confirmed as the market reacts positively to not only the employment of the letter of credit but also the quality of the bank providing this form of credit enhancement. The results also substantiate the role of the rating agency as the principle means by which the bank certification effect is transmitted to the market.

Suggested Citation

  • Roger D. Stover, 1996. "Third-Party Certification in New Issues of Corporate Tax-Exempt Bonds: Standby Letter of Credit and Bond Rating Interaction," Financial Management, Financial Management Association, vol. 25(1), Spring.
    • Handle: RePEc:fma:fmanag:stover96
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    Cited by:

    1. Wei‐Huei Hsu & Abdullah Mamun & Lawrence C. Rose, 2010. "Lead bank quality and adverse rating announcements," Studies in Economics and Finance, Emerald Group Publishing Limited, vol. 27(4), pages 340-357, October.
    2. Schaetzle, Dominik, 2011. "Ökonomische Funktionen von Ratingagenturen: Ratingagenturen in der neoinstitutionalistischen Finanzierungstheorie," Arbeitspapiere 113, University of Münster, Institute for Cooperatives.
    3. Thomas Meyer & Wei-Huei Hsu & Fayez Elayan, 2006. "The valuation effects of bank loan ratings in the presence of multiple monitors," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 30(3), pages 325-346, September.

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