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

Sandeep Dahiya, Manju Puri, Anthony Saunders
2001 Social Science Research Network  
This paper examines the information content of the announcement of the sale of a borrower's loan by its bank. A large body of research has documented the positive impact on a firm's stock price around the announcement of formation and renewal of bank lending relationships. In light of these findings it would seem natural that when a bank chooses to sell off its loans, the stock returns of the borrower would be adversely affected. Our paper is the first study to test this hypothesis. We find
more » ... thesis. We find that the stock returns of these borrowers are significantly negatively impacted on average for 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 the 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 firm whose loan is 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. Cross-sectional tests reveal that loan sales were made by banks that emphasized trading income and had relatively large Commercial and Industrial loan portfolios. For our sample period, a bank's capital adequacy position did not appear to have a material effect on a bank's decision to sell its loans. JEL classification: G14, G21 We would like to thank Linda Allen for helpful comments. "An original lender on a $150 million Bradlees credit reportedly sold a $5 million piece of the revolver in a hurry last week, according to traders familiar with the situation, sending the message to some traders that the lenders most familiar with Bradlees are not comfortable with the company's situation. Because a long-term lender dumped the paper, and urgently, traders said they suspect the lender knew something they did not. " -Bank Letter dated 6/19/1995
doi:10.2139/ssrn.287094 fatcat:xip7na3nuzdh3nd2uxwx462wb4