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Type Journal Article
Scope Discipline-based scholarship
Title Banks and bonds: the impact of bank loan announcements on bond and equity prices
Organization Unit
Authors
  • Steven Ongena
  • Viorel Roscovan
  • Wei-Ling Song
  • Bas Werker
Item Subtype Original Work
Refereed Yes
Status Published in final form
Language
  • English
Journal Title Journal of Financial Management, Markets and Institutions
Publisher Societa Editrice Il Mulino
Geographical Reach international
ISSN 2282-717X
Volume 2
Number 2
Page Range 131 - 155
Date 2014
Abstract Text 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.
Free access at Official URL
Official URL https://www.rivisteweb.it/doi/10.12831/78756
Digital Object Identifier 10.12831/78756
Other Identification Number merlin-id:12111
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