Bank Loan Announcement Effects — Evidence from a Comprehensive 8-K Sample

Abstract

Using a comprehensive sample of over 10,000 bank loan announcements, we find results that differ from the findings of Maskara and Mullineaux (JFE 2011) and also that of Fields et al (JMCB 2006), which indicated that announcement effect of bank loans on borrower stocks disappeared as of late. We find bank loan announcements still have significant impact on borrowing firms' equity prices in our large sample, and our results are in-line with the findings of Billet et al (JF 1995), which was disputed by subsequent papers. Furthermore, we find that firms with lower abnormal spreads relative to the KMV-Merton default-risk model have higher announcements returns, an effect which is more pronounced for smaller firms. We also document that stock price run-up prior to bank loan announcements was quite significant in the early sample period but largely disappeared after the Dodd-Frank Act, indicating information leakage was effectively prevented.

Keywords: Event Study, Big Data, Loan Announcement Return, Bank Loans

JEL Classification: G11, G14