Premium
Are Banks Still Special? New Evidence on Their Role in the Corporate Capital‐Raising Process
Author(s) -
James Christopher,
Smith David C.
Publication year - 2000
Publication title -
journal of applied corporate finance
Language(s) - English
Resource type - Journals
eISSN - 1745-6622
pISSN - 1078-1196
DOI - 10.1111/j.1745-6622.2000.tb00041.x
Subject(s) - debt , business , capital market , quarter (canadian coin) , finance , debt financing , stock (firearms) , capital (architecture) , monetary economics , financial system , stock market , economics , mechanical engineering , archaeology , engineering , history , paleontology , horse , biology
Bankers appear to play a special role in providing commitment‐based financing to corporations. This type of lending is important not only for small firms that lack access to public debt markets but for large and medium‐size companies as well. For such companies, commitment‐based financing provides access to debt capital that becomes valuable when the firm has an immediate need for funding but interest rates in public debt markets are prohibitively high, or the firm is undervalued by the market. A good example of this was provided by the Asian crisis in the last quarter of 1998, when $10 billion of commercial paper was retired and $20 billion of net new commercial loans were booked. The authors also suggest that the fact that commitment‐based financing is used by larger companies when they believe themselves to be undervalued in the market is probably the best explanation of why announcements of these types of loans elicit a positive stock price reaction.