The Effect of Lender Identity on a Borrowing Firm's Equity Return

Matthew T Billett, Mark Flannery and Jon A Garfinkel

Journal of Finance, 1995, vol. 50, issue 2, 699-718

Abstract: Previous research demonstrates that a firm's common stock price tends to fall when it issues new public securities. By contrast, commercial bank loans elicit significantly positive borrower returns. This article investigates whether the lender's identity influences the market's reaction to a loan announcement. Although the authors find no significant difference between the market's response to bank and nonbank loans, they do find that lenders with a higher credit rating are associated with larger abnormal borrower returns. This evidence complements earlier findings that an auditor's or investment banker's perceived 'quality' signals valuable information about firm value to uninformed market investors. Copyright 1995 by American Finance Association.

Date: 1995
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