Information Content in Bank Lines of Credit: Evidence from the Lender's Perspective

Abstract:     
Borrowers realize statistically significant, positive abnormal returns around the announcement date of line-of-credit agreements with banks, and several explanations have been proposed. Little evidence exists, however, on the influence of these agreements on the counterparty, the lending institution, and still less has examined borrower and lender returns jointly. Our paper fills that void. Our evidence suggests that lenders suffer statistically significant losses during the two-day announcement period around such agreements. These losses tend to be concentrated on infrequent lenders. These firms make relatively few deals during the sample period, and relatively few per unit of time. Returns for lenders that execute many agreements are not statistically different from zero. Our evidence suggests that lenders that keep in constant touch with the market for these line-of-credit agreements either have or develop a comparative advantage in engineering them. Future research might well focus on understanding the determinants of this advantage.

Keywords: line of credit, banks, borrowing

JEL Classification: G21

Accepted Paper Series