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Initial bank loans, zero-leverage firms and stock market liquidity

Author

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  • Sijia Zhang
  • Andros Gregoriou

Abstract

Purpose - The purpose of this paper is to examine stock market reactions and liquidity effects following the first bank loan announcement of zero-leverage firms. Design/methodology/approach - The authors use an event studies methodology in both a univariate and multivariate framework. The authors also use regression analysis. Findings - Using a sample of 96 zero-leverage firms listed on the FTSE 350 index over the time period of 2000–2015, the authors find evidence of a significant and permanent stock price increase as a result of the initial debt announcement. The loan announcement results in a sustained increase in trading volume and liquidity. This improvement continues to persist once the authors control for stock price and trading volume effects in both the short and long run. Furthermore, the authors examine the spread decomposition around the same period, and discover the adverse selection of the bid–ask spread is significantly related to the initial bank loan announcement. Research limitations/implications - The results can be attributed to the information cost/liquidity hypothesis, suggesting that investors demand a lower premium for trading stocks with more available information. Originality/value - This is the first paper to look at multiple industries, more than one loan and information asymmetry effects.

Suggested Citation

  • Sijia Zhang & Andros Gregoriou, 2019. "Initial bank loans, zero-leverage firms and stock market liquidity," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 46(5), pages 1028-1051, August.
    • Handle: RePEc:eme:jespps:jes-05-2018-0190
    DOI: 10.1108/JES-05-2018-0190
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    Citations

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    Cited by:

    1. Zhang, Sijia & Gregoriou, Andros, 2021. "The impact of order flow on event study returns: New evidence from zero-leverage firms," The Quarterly Review of Economics and Finance, Elsevier, vol. 80(C), pages 627-634.
    2. Zhang, Sijia & Gregoriou, Andros, 2020. "Post earnings announcement drift, liquidity and zero leverage firms: Evidence from the UK stock market," Journal of Business Research, Elsevier, vol. 116(C), pages 13-26.
    3. Tabash, Mosab I. & Farooq, Umar & Ashfaq, Khurram & Tiwari, Aviral Kumar, 2022. "Economic policy uncertainty and financing structure: A new panel data evidence from selected Asian economies," Research in International Business and Finance, Elsevier, vol. 60(C).

    More about this item

    Keywords

    Liquidity; Information asymmetry; Bid–ask spreads; Price impact; Zero leverage; Initial bank loans; G14; G32;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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