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The Effect of Lender Identity on a Borrowing Firm's Equity Return
Author(s) -
BILLETT MATTHEW T.,
FLANNERY MARK J.,
GARFINKEL JON A.
Publication year - 1995
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1995.tb04801.x
Subject(s) - equity (law) , business , monetary economics , investment banking , loan , stock (firearms) , financial system , credit rating , economics , finance , mechanical engineering , political science , law , engineering
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 we find no significant difference between the market's response to bank and nonbank loans, we 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.