The Effect of Lender Identity on a Borrowing Firm's Equity Return

Posted: 16 May 1994

See all articles by Matthew T. Billett

Matthew T. Billett

Indiana University - Kelley School of Business - Department of Finance

Mark J. Flannery

University of Florida - Department of Finance, Insurance and Real Estate

Jon A. Garfinkel

University of Iowa - Tippie College of Business

Multiple version iconThere are 2 versions of this paper

Date Written: April 1994

Abstract

Previous research has established that a firm's common stock price tends to fall when it issues new public securities. By contrast, commercial bank loans elicit significantly positive returns to the average borrower's stock. The reasons for this positive effect are not well established. This paper employs a large sample of loan and credit line announcements to evaluate whether the lender's identity influences the market's reaction to such an announcement. We find that the market does not distinguish between bank and nonbank loans. However, when we specify lender identity in terms of the lender's credit rating, we find that higher- rated lenders generate larger abnormal borrower equity returns. This evidence complements earlier authors' findings that an auditor's or investment banker's perceived "quality" signals valuable information about firm value to uninformed market investors.

JEL Classification: G12, G14

Suggested Citation

Billett, Matthew T. and Flannery, Mark Jeffrey and Garfinkel, Jon A., The Effect of Lender Identity on a Borrowing Firm's Equity Return (April 1994). Available at SSRN: https://ssrn.com/abstract=5322

Matthew T. Billett

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-3366 (Phone)

Mark Jeffrey Flannery (Contact Author)

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States
352-392-3184 (Phone)
352-392-0103 (Fax)

Jon A. Garfinkel

University of Iowa - Tippie College of Business ( email )

108 PBB
Iowa City, IA 52242-1000
United States
319-335-0943 (Phone)
319-335-3690 (Fax)

HOME PAGE: http://www.biz.uiowa.edu/faculty/jgarfinkel

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