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DEBT FORGIVENESS AND STOCK PRICE REACTION OF LENDING BANKS: THEORY AND EVIDENCE FROM JAPAN
Author(s) -
Isagawa Nobuyuki,
Yamaguchi Satoru,
Yamashita Tadayasu
Publication year - 2010
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.2010.01271.x
Subject(s) - forgiveness , debt , monetary economics , financial system , shareholder , stock (firearms) , economics , loan , proxy (statistics) , internal debt , stock price , business , financial economics , finance , corporate governance , mechanical engineering , philosophy , theology , engineering , paleontology , machine learning , series (stratigraphy) , computer science , biology
We provide a simple model for analyzing how debt forgiveness affects the stock price of a lending bank. Our model shows that although debt forgiveness increases shareholder wealth of a bank in healthy financial condition, it decreases shareholder wealth of a bank in unhealthy financial condition. We empirically investigate the announcement effect of debt forgiveness on bank stock prices in Japanese markets. On average, lending banks experience a significant negative announcement effect with respect to debt forgiveness. Consistent with the prediction of the model, we find a negative relation between the announcement effect and the net bad loan ratio as a proxy of the unhealthiness of the financial condition of the bank.