Determinants of Market Reactions to Project Finance Approvals
41 Pages Posted: 23 Aug 2019
Date Written: July 31, 2018
Despite the growing importance of project loans in funding large-scale projects, there is a void in the finance literature examining market reactions to project financing. Using a unique hand-collected sample of mining project finance deals announced by listed single project mine developers, we document on average a significant, positive 3-day market-adjusted return of 2.18%, suggesting project finance is associated with value creation. Further, there are very few studies in the financial economics literature of information asymmetry and its implications for small firms. We further document a reduction of 2.28% in bid-ask spread around all project finance announcements, suggesting a lowering of information asymmetry. In multivariate analysis, we find the event window abnormal returns are significantly higher for project loans where the borrower exhibits higher pre-event return volatility and for projects located in areas with higher political uncertainty. In additional tests, we explore the implications of bank versus non-bank loans on market reactions and find that non-bank lenders, as a group are associated with higher returns relative to bank lenders. Our results are robust to controlling for a host of factors, including loan syndication, lender equity ownership, lender specialisation and borrower characteristics such as size and insider ownership.
Keywords: project finance, lender identity, market reactions, information asymmetry
JEL Classification: G21, G12
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