Journal of Financial and Quantitative Analysis

Research Article

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

Matthew T. Billetta1, Mark J. Flannerya2 and Jon A. Garfinkela3

a1 matt-billett@uiowa.edu, University of Iowa, Tippie College of Business, Iowa City, IA 52242

a2 jon-garfinkel@uiowa.edu, University of Iowa, Tippie College of Business, Iowa City, IA 52242

a3 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.

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