The Wealth Effects of Bank Financing Announcements in Highly Leveraged Transactions

Posted: 2 Oct 1999

See all articles by William Kracaw

William Kracaw

Pennsylvania State University - Department of Finance

Marc Zenner

Citigroup, Inc. - Investment Banking Division

Date Written: December 1994

Abstract

We analyze the effect of financing announcements of highly leveraged transactions (HLTs) on the stock prices of the banks that lead HLT-lending syndicates. Our sample of HLT financing announcements consists of 29 leveraged buyouts and 12 leveraged recapitalizations representing 76 bank financing announcements over the 1983-1989 period. We find that (i) the first HLT announcement and the first bank financing announcement result in positive wealth effects for the banks playing a major role in the loan syndication; (ii) bank wealth effects are lower after 1984 and for smaller HLTs; (iii) bank stock price reactions at the announcement of the HLT and its financing do not provide evidence that the market anticipates which HLTs will eventually fail. Together, our results cast doubt on the conjecture that HLT loans have undermined the interests of bank shareholders. Additionally, we find that LBO targets gain about 2%, whereas leveraged recap targets lose about 2% when the bank financing agreement is announced.

JEL Classification: G21, G32, G34

Suggested Citation

Kracaw, William and Zenner, Marc, The Wealth Effects of Bank Financing Announcements in Highly Leveraged Transactions (December 1994 ). Available at SSRN: https://ssrn.com/abstract=6055

William Kracaw

Pennsylvania State University - Department of Finance ( email )

609L BUSINESS ADMIN BL
University Park, PA 16802
United States
814-863 0486 (Phone)

Marc Zenner (Contact Author)

Citigroup, Inc. - Investment Banking Division ( email )

Salomon Smith Barney
388 Greenwich St., 24th Flr
New York, NY 10013
United States

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