Bank Balance Sheets and the Value of Lending
29 Pages Posted: 16 Oct 2017
Date Written: May 2017
Abstract
We study 1,400 UK syndicated loans, together with the financial history of the lead bank andthe borrowing firm. We interpret abnormal equity returns around loan announcements as thevalue of the lending relationship to the firm. We find that: (i) Consistent with previousevidence, the value of lending is higher when the firm is riskier or more opaque, suggestingthat it primarily reflects the lead bank's screening and monitoring activities. (ii) As a bankbecomes larger, more profitable or more capitalized, the value of its loans first increases andthen decreases. The largest, most capitalised or most profitable banks do not give the mostvaluable loans. (iii) Firms which receive low-value loans are more likely to experience lowprofitability and financial distress during the lending relationship. By relating the state ofbank balance sheets to borrower performance, we offer a new angle to evaluate the impact offinancial conditions on the real economy.
Keywords: Europe, United Kingdom, Bank balance sheets, loan announcement effect, bank monitoring, Financial Markets and the Macroeconomy
JEL Classification: E44, G21, G14
Suggested Citation: Suggested Citation