Determinants of Market Reactions to Project Finance Approvals

41 Pages Posted: 23 Aug 2019

See all articles by Andrew Ferguson

Andrew Ferguson

Department of Accounting, UTS

Matthew Grosse

University of Technology Sydney (UTS) - School of Accounting

Peter Lam

University of Technology, Sydney - Discipline of Accounting; Financial Research Network (FIRN)

Date Written: July 31, 2018

Abstract

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

Suggested Citation

Ferguson, Andrew and Grosse, Matthew James and Lam, Peter, Determinants of Market Reactions to Project Finance Approvals (July 31, 2018). Available at SSRN: https://ssrn.com/abstract=2395694

Andrew Ferguson (Contact Author)

Department of Accounting, UTS ( email )

PO Box 123 Broadway
Sydney, NSW 2007
Australia
61 2 9514 3565 (Phone)

Matthew James Grosse

University of Technology Sydney (UTS) - School of Accounting ( email )

P.O. Box 123
Broadway NSW 2007
AUSTRALIA

Peter Lam

University of Technology, Sydney - Discipline of Accounting ( email )

P.O. Box 123 Broadway
Sydney, NSW 2007
Australia
02 9514 3926 (Phone)
02 9514 3669 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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