Private Information and Bank-Loan Pricing: The Effect of Upcoming Corporate Spinoffs

54 Pages Posted: 19 Jun 2023

See all articles by Ole-Kristian Hope

Ole-Kristian Hope

University of Toronto - Rotman School of Management

Vlad-Andrei Porumb

University of Manchester - Alliance Manchester Business School

Simona Rusanescu

University of Groningen - Faculty of Economics and Business, Department of Accounting and Auditing

Dushyantkumar Vyas

University of Toronto - Rotman School of Management; University of Toronto at Mississauga

Multiple version iconThere are 2 versions of this paper

Date Written: June 12, 2023

Abstract

Corporate spinoffs are important events that are accompanied by valuation and credit-risk implications for the parent firm. Among other benefits, spinoffs can improve corporate focus and enhance valuation transparency. In the debt-contracting context, however, spinoffs can also be associated with negative outcomes for the divesting firms. We examine whether banks, due to their timely access to material private information, are able to ascertain the likelihood and the implications of impending spinoffs for the parent firm before a formal public announcement of the spinoff. Our empirical analyses indicate that, in the 365-day pre-spinoff announcement period, banks charge incrementally higher (lower) spreads to borrowers with increased (decreased) post-spinoff riskiness relative to non-divesting firms. This suggests that, while lenders recognize the value- and transparency-enhancing effects of spinoffs, they are also able to foresee potentially negative implications of these divestitures. Cross-sectional analyses indicate that banks charge incrementally lower loan spreads if spinoffs result in high-risk borrowers having either higher reporting quality or lower reporting or operational complexity. These results suggest that the post-spinoff increase in riskiness is compensated by the divestiture benefits typically associated with spinoffs. Similarly, high-risk borrowers incur larger spreads if they do not undergo “focus-increasing” spinoffs. Overall, our findings suggest that banks are able to ex-ante determine the implications of important corporate events such as spinoffs.

Keywords: Spinoffs; Bank-Loan Pricing; Private Information; Financial Reporting Quality; Complexity; Ex-Ante Analyses

JEL Classification: G21, G30, G34, M10, M40, M41

Suggested Citation

Hope, Ole-Kristian and Porumb, Vlad-Andrei and Rusanescu, Simona and Vyas, Dushyantkumar, Private Information and Bank-Loan Pricing: The Effect of Upcoming Corporate Spinoffs (June 12, 2023). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=4476918

Ole-Kristian Hope (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

HOME PAGE: http://www.rotman.utoronto.ca/FacultyAndResearch/Faculty/FacultyBios/Hope.aspx

Vlad-Andrei Porumb

University of Manchester - Alliance Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

Simona Rusanescu

University of Groningen - Faculty of Economics and Business, Department of Accounting and Auditing ( email )

Nettelbosje 2
Groningen, Groningen 9747 AE
Netherlands

Dushyantkumar Vyas

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

University of Toronto at Mississauga ( email )

3359 Mississauga Rd N.
3205 William Davis Building
Mississauga, Ontario L5L 1C6
Canada

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