Bank Loan Announcement Effects — Evidence from a Comprehensive 8-K Sample

Using a comprehensive sample of over 10,000 bank loan announcements, we find results that differ from the findings of Maskara and Mullineaux (JFE 2011) and also that of Fields et al (JMCB 2006), which indicated that announcement effect of bank loans on borrower stocks disappeared as of late. We find bank loan announcements still have significant impact on borrowing firms' equity prices in our large sample, and our results are in-line with the findings of Billet et al (JF 1995), which was disputed by subsequent papers. Furthermore, we find that firms with lower abnormal spreads relative to the KMV-Merton default-risk model have higher announcements returns. We also document that, although information leakage (in terms of the run-up of borrowers' stock price prior to announcements) was quite significant in earlier sample periods, in recent periods there is much less information leakage prior to 8-K announcements of bank loans, and at least in this aspect the Dodd-Frank Act can be deemed as quite effective