Information asymmetry, hedging and wealth effects of project finance loan approvals
64 Pages Posted: 23 Aug 2019 Last revised: 11 May 2021
Date Written: May 11, 2020
Using a unique hand-collected sample, we study market reactions to mining developers announcing project finance loans. We document a significant 3-day abnormal return of 2.2% and a 2.51% reduction in abnormal bid-ask spread, consistent with information transfer from private lenders to equityholders and reduction in asymmetric information. Further analysis reveals a negative association between announcement return and hedging requirements specified in loan contracts, suggesting a wealth transfer from equityholders to debtholders. We also find that loans for projects located in high political risk jurisdictions are met with higher announcement returns.
Keywords: Project finance, hedging, event study, political uncertainty, loan pricing
JEL Classification: G21, G12
Suggested Citation: Suggested Citation