Sources of Value in Bank Lines of Credit: Evidence from the Lender's Perspective
Bank Structure and Competition: Credit Markets in Transition, Federal Reserve Bank of Chicago, pp. 230-252, 1992
Posted: 4 Aug 2005
Previous work shows that firms earn statistically significant, positive abnormal returns when they announce favorable revisions of line-of-credit agreements with banks, and many explanations have been proposed. Conspicuously absent is evidence of the impact of these agreements on the other party to the transaction, the lending institution. This paper fills that void. Our evidence suggests that lenders suffer statistically significant losses during the two-day announcement period around such agreements. Lenders' losses are concentrated primarily on infrequent lenders. These firms make relatively few deals during the sample period, and relatively few per unit of time. Returns for firms which engineer many agreements are statistically not different from zero. Our evidence suggests that firms which keep in constant touch with the market for these line-of-credit agreements either have or develop a comparative advantage in engineering them.
Keywords: line of credit, banks, financial institutions
JEL Classification: G21
Suggested Citation: Suggested Citation