Information Asymmetry, Financial Intermediation, and Wealth Effects of Project Finance Loans

Andrew Ferguson and Peter Lam

The Review of Corporate Finance Studies, 2023, vol. 12, issue 3, 656-711

Abstract: Using a unique hand-collected sample, we study market reactions to mining developers announcing project finance loans. We document a significant three-day abnormal return of 2.6% and a 3.4% reduction in abnormal bid-ask spread around loan approvals, consistent with information transfer from private lenders to equity holders and reduction in asymmetric information. Cross-sectional analysis reveals a negative association between announcement return and hedging requirements specified in loan contracts, which becomes insignificant after controlling for treatment effects of hedging. Specialist banks do not charge lower rates but are more likely to impose hedging requirements, consistent with rent extraction due to bargaining power. (JEL G30, G32)

Date: 2023
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