Bank Borrowers and Loan Sales : New Evidence on the Uniqueness of Bank Loans

This paper examines the information content of the announcement of a sale of a borrower's loans by its lending bank. A large body of research has documented the positive impact on a firm's stock price around the announcement of initiating or renewing a lending relationship. In light of these findings it would seem natural that when a bank chooses to sell off the loans of a particular borrower, that the stock returns of the borrower would be adversely affected; particularly for sales of sub-par loans where the bank's information advantage is likely to be highest. Our paper is the first to test this hypothesis. We find that the stock returns of borrowers are significantly negatively impacted in the period surrounding the announcement of a loan sale. The post-loan sale period is also marked by a large incidence of bankruptcy filings by those borrowers whose loans are sold. Overall, the evidence supports the hypothesis that the news of a bank loan sale has a negative certification impact, which is validated by the subsequent performance of the firms whose loans are sold. We conduct similar event study tests for those banks that engage in loan sales and find that the stock returns of the selling banks are not significantly impacted on average