Bank Borrowers and Loan Sales: New Evidence on the Uniqueness of Bank Loans

27 Pages Posted: 3 Nov 2008

See all articles by Sandeep Dahiya

Sandeep Dahiya

Georgetown University - Department of Finance

Manju Puri

Duke University - Fuqua School of Business; NBER; FDIC

Anthony Saunders

New York University - Leonard N. Stern School of Business

Multiple version iconThere are 4 versions of this paper

Date Written: July 2000

Abstract

This paper examines the information content of the announcement of the sale of a borrower s loan by its bank. A large body of research has documented the positive impact on a firm s stock price around the announcement of formation and renewal of bank lending relationships. In light of these findings it would seem natural that when a bank chooses to sell off its loans, the stockreturns of the borrower would be adversely affected. Our paper is the first study to test this hypothesis. We find that the stock returns of these borrowers are significantly negatively impacted on average for the period surrounding the announcement of a loan sale. The post-loan sale period is also marked by a large incidence of bankruptcy filings by the borrowers whose loans are sold. Overall, the evidence supports the hypothesis that the news of a bank loan sale has a negative certification impact, which is validated by the subsequent performance of the firmwhose loan is sold. We conduct similar event study tests for those banks that engage in loan sales and find that the stock returns of the selling banks are not significantly impacted on average. Cross-sectional tests reveal that loan sales were made by banks that emphasized trading income and had relatively large Commercial and Industrial loan portfolios. For our sample period, abank s capital adequacy position did not appear to have a material effect on a bank s decision to sell its loans.

Keywords: Loan sales, Lending relationship, Commercial banks

Suggested Citation

Dahiya, Sandeep and Puri, Manju and Saunders, Anthony, Bank Borrowers and Loan Sales: New Evidence on the Uniqueness of Bank Loans (July 2000). NYU Working Paper No. FIN-00-008. Available at SSRN: https://ssrn.com/abstract=1294624

Sandeep Dahiya (Contact Author)

Georgetown University - Department of Finance ( email )

3700 O Street, NW
Washington, DC 20057
United States
202-687-3832 (Phone)

Manju Puri

Duke University - Fuqua School of Business ( email )

100 Fuqua Drive
Box 90120
Durham, NC 27708-0120
United States
919-660-7657 (Phone)

NBER

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

FDIC ( email )

550 17th Street NW
Washington, DC 20429
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Anthony Saunders

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
9-190, MEC
New York, NY 10012-1126
United States
212-998-0711 (Phone)
212-995-4220 (Fax)

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