The Effect of Lender Identity on a Borrowing Firm's Equity Return
Posted: 16 May 1994
Date Written: April 1994
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: Suggested Citation