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Are Bank Loans Special? Evidence on the Post-Announcement Performance of Bank Borrowers

Published online by Cambridge University Press:  06 April 2009

Matthew T. Billett
Affiliation:
matt-billett@uiowa.edu, University of Iowa, Tippie College of Business, Iowa City, IA 52242
Mark J. Flannery
Affiliation:
jon-garfinkel@uiowa.edu, University of Iowa, Tippie College of Business, Iowa City, IA 52242
Jon A. Garfinkel
Affiliation:
flannery@ufl.edu, University of Florida, Warrington College of Business Administration, Box 117168, Gainesville, FL 32611.

Abstract

Unlike seasoned equity or public debt offerings, bank loan financing elicits a significantly positive announcement return, which has led financial economists to characterize bank loans as “special.” Here, we find that firms announcing bank loans suffer negative abnormal stock returns over the subsequent three years. In the long run, bank loans appear no different from seasoned equity offerings or public debt issues. Our evidence suggests that larger loans (relative to borrower equity) are followed by worse stock performance. We also find that lender protection is negatively related to borrower performance, suggesting the lender is somewhat shielded from the poor performance.

Type
Research Article
Copyright
Copyright © School of Business Administration, University of Washington 2006

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