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Banks and bonds: the impact of bank loan announcements on bond and equity prices


Ongena, Steven; Roscovan, Viorel; Werker, Bas; Song, Wei-Ling (2014). Banks and bonds: the impact of bank loan announcements on bond and equity prices. Journal of Financial Management, Markets and Institutions, 2(2):131-155.

Abstract

We study the effect of bank loan announcements on the borrowing firms' bond and equity prices. Our sample consists of 896 loan deals signed between 1997 to 2003 involving 364 different US firms. We report the first comprehensive evidence that also firm bond prices react to bank loan announcements. Using a two-day event window, we find significant abnormal bond credit spreads reduction of 11 basis point spread (BPS) on average. The corresponding average stock price reaction is 26 BPS. While stock returns are unaffected by firm risk, bondholders of riskier firms are more sensitive to the loss given default which increases with bank borrowing. Such firms experience bond credit spread increases. Our analysis also provides an estimate of the net impact on firm value of bank loan announcements, between -5 BPS for riskier and smaller firms and 18 BPS for safer and larger companies. Collectively, the results indicate that the overall positive effect on equity value comes from two sources. First, bank certification reduces information asymmetry. Second, there is a transfer of bondholder's wealth to the shareholders as a result of claim dilution.

We study the effect of bank loan announcements on the borrowing firms' bond and equity prices. Our sample consists of 896 loan deals signed between 1997 to 2003 involving 364 different US firms. We report the first comprehensive evidence that also firm bond prices react to bank loan announcements. Using a two-day event window, we find significant abnormal bond credit spreads reduction of 11 basis point spread (BPS) on average. The corresponding average stock price reaction is 26 BPS. While stock returns are unaffected by firm risk, bondholders of riskier firms are more sensitive to the loss given default which increases with bank borrowing. Such firms experience bond credit spread increases. Our analysis also provides an estimate of the net impact on firm value of bank loan announcements, between -5 BPS for riskier and smaller firms and 18 BPS for safer and larger companies. Collectively, the results indicate that the overall positive effect on equity value comes from two sources. First, bank certification reduces information asymmetry. Second, there is a transfer of bondholder's wealth to the shareholders as a result of claim dilution.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:February 2014
Deposited On:18 Jan 2016 13:39
Last Modified:05 Apr 2016 19:55
Publisher:Societa Editrice Il Mulino
ISSN:2282-717X
Free access at:Publisher DOI. An embargo period may apply.
Publisher DOI:https://doi.org/10.12831/78756
Official URL:https://www.rivisteweb.it/doi/10.12831/78756
Other Identification Number:merlin-id:12111
Permanent URL: https://doi.org/10.5167/uzh-119593

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