The Effect of Lender Identity on a Borrowing Firm's Equity Return

Abstract

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 paper 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.

JEL Classification: G32, G21