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

31 Pages Posted: 13 Oct 2001  

Sandeep Dahiya

Georgetown University - Department of Finance

Manju Puri

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER); Duke Innovation & Entrepreneurship Initiative

Anthony Saunders

New York University - Leonard N. Stern School of Business

Multiple version iconThere are 4 versions of this paper

Date Written: October 2001

Abstract

This paper examines the information content of the announcement of a sale of a borrower's loans by its lending bank. A large body of research has documented the positive impact on a firm's stock price around the announcement of initiating or renewing a lending relationship. In light of these findings it would seem natural that when a bank chooses to sell off the loans of a particular borrower, that the stock returns of the borrower would be adversely affected; particularly for sales of sub-par loans where the bank's information advantage is likely to be highest. Our paper is the first to test this hypothesis. We find that the stock returns of borrowers are significantly negatively impacted in 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 those 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 firms whose loans are 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.

Keywords: Loan sales, Lending relationship, Commercial banks

JEL Classification: G14, G21

Suggested Citation

Dahiya, Sandeep and Puri, Manju and Saunders, Anthony, Bank Borrowers and Loan Sales: New Evidence on the Uniqueness of Bank Loans (October 2001). AFA 2002 Atlanta Meetings. Available at SSRN: https://ssrn.com/abstract=287094 or http://dx.doi.org/10.2139/ssrn.287094

Sandeep Dahiya

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 )

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

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Duke Innovation & Entrepreneurship Initiative

215 Morris St., Suite 300
Durham, NC 27701
United States

Anthony Saunders (Contact Author)

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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