Lead bank quality and adverse rating announcements

Wei‐Huei Hsu, Abdullah Mamun and Lawrence Rose

Studies in Economics and Finance, 2010, vol. 27, issue 4, 340-357

Abstract: Purpose - This paper seeks to examine whether the market values the monitoring activity undertaken by a quality bank in the presence of a credit rating agency. Specifically, the question is asked whether the quality of a lead lending bank influences a market reaction to adverse rating announcements concerning its borrowers. Design/methodology/approach - The event study methodology and various bank quality proxies (size, growth rate in assets, profitability, capital ratio, bank's credit rating, and ownership) are used to examine the market reaction when a borrower's bank loan rating is placed with negative implication or is downgraded. Findings - Firms which are certified and monitored by high‐quality banks are less susceptible to negative market reactions when adverse rating announcements are made. Originality/value - The findings indicate high‐quality lending banks sustain investors' confidence in their borrowers in the face of deteriorating news. The paper argues that investors and borrowers value monitoring from a high‐quality bank, which is an implication of a bank having access to private information about its borrowers.

Keywords: Banks; Credit rating; Banking; Quality (search for similar items in EconPapers)
Date: 2010
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Persistent link: https://EconPapers.repec.org/RePEc:eme:sefpps:v:27:y:2010:i:4:p:340-357

DOI: 10.1108/10867371011085165

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