The Effect of Lender Identity on a Borrowing Firm's Equity Return

Previous research demonstrates that a firm's common stock price tends to fall when it issues new public securities. By contrast, commercial bank loans elicit significantly positive borrower returns. This article investigates whether the lender's identity influences the market's reaction to a loan announcement. Although the authors find no significant difference between the market's response to bank and nonbank loans, they do find that lenders with a higher credit rating are associated with larger abnormal borrower returns. This evidence complements earlier findings that an auditor's or investment banker's perceived 'quality' signals valuable information about firm value to uninformed market investors. Copyright 1995 by American Finance Association.

[1]  Clifford W. Smith.  INVESTMENT BANKING AND THE CAPITAL ACQUISITION PROCESS , 1986 .

[2]  Douglas W. Diamond.  Financial Intermediation and Delegated Monitoring , 1984 .

[3]  D. Simonson.  Business Strategies: Bank Commercial Lending vs. Finance Company Lending , 1994 .

[4]  Myron B. Slovin,et al.  External monitoring and its effect on seasoned common stock issues , 1990 .

[5]  Donald J. Mullineaux,et al.  Monitoring by financial intermediaries: Banks vs. Nonbanks , 1994 .

[6]  Burton G. Malkiel,et al.  Bank Portfolio Allocation, Deposit Variability, and the Availability Doctrine , 1965 .

[7]  Myron B. Slovin,et al.  The Value of Bank Durability: Borrowers as Bank Stakeholders , 1993 .

[8]  James R. Booth.  Contract costs, bank loans, and the cross-monitoring hypothesis , 1992 .

[9]  Randolph P. Beatty,et al.  INVESTMENT BANKING, REPUTATION, AND THE UNDERPRICING OF INITIAL PUBLIC OFFERINGS* , 1986 .

[10]  Ronald W. Best,et al.  Alternative information sources and the information content of bank loans , 1993 .

[11]  Robert W. Holthausen,et al.  The effect of bond rating changes on common stock prices , 1986 .

[12]  John D. Benjamin,et al.  Pricing fixed rate mortgages: Some empirical evidence , 1990 .

[13]  John J. McConnell,et al.  Further evidence on the bank lending process and the capital-market response to bank loan agreements , 1989 .

[14]  E. Fama,et al.  What's different about banks?☆ , 1985 .

[15]  Simon H. Kwan.  The certification value of bank loans , 1994 .

[16]  Christopher M. James,et al.  Some evidence on the uniqueness of bank loans , 1987 .

[17]  W. Mikkelson,et al.  Valuation effects of security offerings and the issuance process , 1986 .

[18]  Shane A. Johnson,et al.  Firm size and the information content of bank loan announcements , 1992 .

[19]  Robert A. Korajczyk,et al.  The Effect of Information Releases on the Pricing and Timing of Equity Issues , 1991 .

[20]  Thomas J. Chemmanur,et al.  Investment Bank Reputation, Information Production, and Financial Intermediation , 1994 .

[21]  Thomas J. Chemmanur,et al.  Reputation, Renegotiation, and the Choice between Bank Loans and Publicly Traded Debt , 1994 .

[22]  Fischer Black,et al.  Bank funds management in an efficient market , 1975 .

[23]  M. Flannery,et al.  Capital regulation and insured banks choice of individual loan default risks , 1989 .

[24]  John R. M. Hand,et al.  The Effect of Bond Rating Agency Announcements on Bond and Stock Prices , 1992 .

[25]  Douglas W. Diamond.  Monitoring and Reputation: The Choice between Bank Loans and Directly Placed Debt , 1991, Journal of Political Economy.

[26]  Steven Manaster,et al.  Initial Public Offerings and Underwriter Reputation , 1990 .