IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/116398.html
   My bibliography  Save this paper

The impact of bank loan announcements on stock liquidity

Author

Listed:
  • Pham, Thu Phuong
  • Singh, Harminder
  • Vu, Van Hoang

Abstract

We examine the impact of bank loan announcements on stock liquidity. Using a comprehensive loan announcement sample over 14 years in Australia, we find that effective spreads and realised spreads of borrowers' stocks fall after the announcements. The findings suggest these announcements send positive signals about borrowers to the market that increases liquidity provision, and reduce transaction costs, leading to improved liquidity for borrowers’ stocks. This liquidity improvement is more pronounced following announcements of new loans than loan renewals. Overall, our findings provide practical implications for firm managers in the financing decision-making process and market participants in trading strategy adjustment.

Suggested Citation

  • Pham, Thu Phuong & Singh, Harminder & Vu, Van Hoang, 2023. "The impact of bank loan announcements on stock liquidity," MPRA Paper 116398, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:116398
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/116398/1/MPRA_paper_116398.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Brogaard, Jonathan & Li, Dan & Xia, Ying, 2017. "Stock liquidity and default risk," Journal of Financial Economics, Elsevier, vol. 124(3), pages 486-502.
    2. Alex Edmans & Vivian W. Fang & Emanuel Zur, 2013. "The Effect of Liquidity on Governance," The Review of Financial Studies, Society for Financial Studies, vol. 26(6), pages 1443-1482.
    3. Lummer, Scott L. & McConnell, John J., 1989. "Further evidence on the bank lending process and the capital-market response to bank loan agreements," Journal of Financial Economics, Elsevier, vol. 25(1), pages 99-122, November.
    4. Tarun Chordia & Richard Roll & Avanidhar Subrahmanyam, 2001. "Market Liquidity and Trading Activity," Journal of Finance, American Finance Association, vol. 56(2), pages 501-530, April.
    5. Jannis Bischof & Holger Daske, 2013. "Mandatory Disclosure, Voluntary Disclosure, and Stock Market Liquidity: Evidence from the EU Bank Stress Tests," Journal of Accounting Research, Wiley Blackwell, vol. 51(5), pages 997-1029, December.
    6. Bengt Holmstrom & Jean Tirole, 1997. "Financial Intermediation, Loanable Funds, and The Real Sector," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(3), pages 663-691.
    7. Ginglinger, Edith & Hamon, Jacques, 2007. "Actual share repurchases, timing and liquidity," Journal of Banking & Finance, Elsevier, vol. 31(3), pages 915-938, March.
    8. Nyborg, Kjell G. & Wang, Zexi, 2021. "The effect of stock liquidity on cash holdings: The repurchase motive," Journal of Financial Economics, Elsevier, vol. 142(2), pages 905-927.
    9. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    10. Yakov Amihud & Allaudeen Hameed & Wenjin Kang & Huiping Zhang, 2015. "Stock Liquidity and the Cost of Equity Capital in Global Markets," Journal of Applied Corporate Finance, Morgan Stanley, vol. 27(4), pages 68-74, December.
    11. James, Christopher, 1987. "Some evidence on the uniqueness of bank loans," Journal of Financial Economics, Elsevier, vol. 19(2), pages 217-235, December.
    12. Copeland, Thomas E & Galai, Dan, 1983. "Information Effects on the Bid-Ask Spread," Journal of Finance, American Finance Association, vol. 38(5), pages 1457-1469, December.
    13. Fang, Vivian W. & Noe, Thomas H. & Tice, Sheri, 2009. "Stock market liquidity and firm value," Journal of Financial Economics, Elsevier, vol. 94(1), pages 150-169, October.
    14. Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, vol. 14(1), pages 71-100, March.
    15. Chung, Kee H. & Elder, John & Kim, Jang-Chul, 2010. "Corporate Governance and Liquidity," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(2), pages 265-291, April.
    16. Amihud, Yakov & Mendelson, Haim, 1986. "Asset pricing and the bid-ask spread," Journal of Financial Economics, Elsevier, vol. 17(2), pages 223-249, December.
    17. Mark Lang & Karl V. Lins & Mark Maffett, 2012. "Transparency, Liquidity, and Valuation: International Evidence on When Transparency Matters Most," Journal of Accounting Research, Wiley Blackwell, vol. 50(3), pages 729-774, June.
    18. Mikkelson, Wayne H. & Partch, M. Megan, 1986. "Valuation effects of security offerings and the issuance process," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 31-60.
    19. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 51(3), pages 393-414.
    20. Campbell, Tim S & Kracaw, William A, 1980. "Information Production, Market Signalling, and the Theory of Financial Intermediation," Journal of Finance, American Finance Association, vol. 35(4), pages 863-882, September.
    21. Kale, Jayant R. & Loon, Yee Cheng, 2011. "Product market power and stock market liquidity," Journal of Financial Markets, Elsevier, vol. 14(2), pages 376-410, May.
    22. Mosebach, Michael, 1999. "Market response to banks granting lines of credit," Journal of Banking & Finance, Elsevier, vol. 23(11), pages 1707-1723, November.
    23. Hasan, Iftekhar & Hoi, Chun Keung (Stan) & Wu, Qiang & Zhang, Hao, 2014. "Beauty is in the eye of the beholder: The effect of corporate tax avoidance on the cost of bank loans," Journal of Financial Economics, Elsevier, vol. 113(1), pages 109-130.
    24. Øyvind Norli & Charlotte Ostergaard & Ibolya Schindele, 2015. "Liquidity and Shareholder Activism," The Review of Financial Studies, Society for Financial Studies, vol. 28(2), pages 486-520.
    25. repec:mcb:jmoncb:v:45:y:2013:i::p:781-820 is not listed on IDEAS
    26. Jain, Pawan & Jiang, Christine & Mekhaimer, Mohamed, 2016. "Executives' horizon, internal governance and stock market liquidity," Journal of Corporate Finance, Elsevier, vol. 40(C), pages 1-23.
    27. Yangyang Chen & Rui Ge & Henock Louis & Leon Zolotoy, 2019. "Stock liquidity and corporate tax avoidance," Review of Accounting Studies, Springer, vol. 24(1), pages 309-340, March.
    28. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    29. Amihud, Yakov, 2002. "Illiquidity and stock returns: cross-section and time-series effects," Journal of Financial Markets, Elsevier, vol. 5(1), pages 31-56, January.
    30. Easley, David & O'Hara, Maureen, 1987. "Price, trade size, and information in securities markets," Journal of Financial Economics, Elsevier, vol. 19(1), pages 69-90, September.
    31. Terrence Hendershott & Charles M. Jones, 2005. "Island Goes Dark: Transparency, Fragmentation, and Regulation," The Review of Financial Studies, Society for Financial Studies, vol. 18(3), pages 743-793.
    32. repec:dau:papers:123456789/5478 is not listed on IDEAS
    33. Shan, Chenyu & Tang, Dragon Yongjun & Winton, Andrew, 2019. "Do banks still monitor when there is a market for credit protection?," Journal of Accounting and Economics, Elsevier, vol. 68(2).
    34. Paul Brockman & Dennis Y. Chung, 2003. "Investor Protection and Firm Liquidity," Journal of Finance, American Finance Association, vol. 58(2), pages 921-937, April.
    35. John R. Graham & Jennifer L. Koski & Uri Loewenstein, 2006. "Information Flow and Liquidity around Anticipated and Unanticipated Dividend Announcements," The Journal of Business, University of Chicago Press, vol. 79(5), pages 2301-2336, September.
    36. repec:dau:papers:123456789/1748 is not listed on IDEAS
    37. Karthik Balakrishnan & Mary Brooke Billings & Bryan Kelly & Alexander Ljungqvist, 2014. "Shaping Liquidity: On the Causal Effects of Voluntary Disclosure," Journal of Finance, American Finance Association, vol. 69(5), pages 2237-2278, October.
    38. Jiang, Fuxiu & Ma, Yunbiao & Shi, Beibei, 2017. "Stock liquidity and dividend payouts," Journal of Corporate Finance, Elsevier, vol. 42(C), pages 295-314.
    39. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    40. Fama, Eugene F., 1985. "What's different about banks?," Journal of Monetary Economics, Elsevier, vol. 15(1), pages 29-39, January.
    41. Brockman, Paul & Chung, Dennis Y. & Yan, Xuemin (Sterling), 2009. "Block Ownership, Trading Activity, and Market Liquidity," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(6), pages 1403-1426, December.
    42. Pham, Mia Hang, 2020. "In law we trust: Lawyer CEOs and stock liquidity," Journal of Financial Markets, Elsevier, vol. 50(C).
    43. Hillert, Alexander & Maug, Ernst & Obernberger, Stefan, 2016. "Stock repurchases and liquidity," Journal of Financial Economics, Elsevier, vol. 119(1), pages 186-209.
    44. Suhee Kim & William Rees & Vathunyoo Sila, 2020. "Do anti‐bribery laws reduce the cost of equity? Evidence from the UK Bribery Act 2010," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 47(3-4), pages 438-455, March.
    45. Nishant Dass & Massimo Massa, 2011. "The Impact of a Strong Bank-Firm Relationship on the Borrowing Firm," The Review of Financial Studies, Society for Financial Studies, vol. 24(4), pages 1204-1260.
    46. Best, Ronald & Zhang, Hang, 1993. "Alternative Information," Journal of Finance, American Finance Association, vol. 48(4), pages 1507-1522, September.
    47. Lilian Ng & Fei Wu & Jing Yu & Bohui Zhang, 2016. "Foreign Investor Heterogeneity and Stock Liquidity around the World," Review of Finance, European Finance Association, vol. 20(5), pages 1867-1910.
    48. Boehmer, Ekkehart, 2005. "Dimensions of execution quality: Recent evidence for US equity markets," Journal of Financial Economics, Elsevier, vol. 78(3), pages 553-582, December.
    49. Bushee, Brian J. & Leuz, Christian, 2005. "Economic consequences of SEC disclosure regulation: evidence from the OTC bulletin board," Journal of Accounting and Economics, Elsevier, vol. 39(2), pages 233-264, June.
    50. Massoud, Nadia & Nandy, Debarshi & Saunders, Anthony & Song, Keke, 2011. "Do hedge funds trade on private information? Evidence from syndicated lending and short-selling," Journal of Financial Economics, Elsevier, vol. 99(3), pages 477-499, March.
    51. Billett, Matthew T & Flannery, Mark J & Garfinkel, Jon A, 1995. "The Effect of Lender Identity on a Borrowing Firm's Equity Return," Journal of Finance, American Finance Association, vol. 50(2), pages 699-718, June.
    52. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    53. Glosten, Lawrence R. & Harris, Lawrence E., 1988. "Estimating the components of the bid/ask spread," Journal of Financial Economics, Elsevier, vol. 21(1), pages 123-142, May.
    54. repec:zbw:bofrdp:2014_003 is not listed on IDEAS
    55. Gourieroux, Christian & Jasiak, Joanna & Le Fol, Gaelle, 1999. "Intra-day market activity," Journal of Financial Markets, Elsevier, vol. 2(3), pages 193-226, August.
    56. Barclay, M.J. & Smith, C.W., 1988. "Corporate Payout Policy: Cash Dividencds Versus Open- Market Repurchases," Papers 88-10, Rochester, Business - Managerial Economics Research Center.
    57. Dang, Viet Anh & Michayluk, David & Pham, Thu Phuong, 2018. "The curious case of changes in trading dynamics: When firms switch from NYSE to NASDAQ," Journal of Financial Markets, Elsevier, vol. 41(C), pages 17-35.
    58. Yihui Wang & Han Xia, 2014. "Do Lenders Still Monitor When They Can Securitize Loans?," The Review of Financial Studies, Society for Financial Studies, vol. 27(8), pages 2354-2391.
    59. Christine A. Parlour & Guillaume Plantin, 2008. "Loan Sales and Relationship Banking," Journal of Finance, American Finance Association, vol. 63(3), pages 1291-1314, June.
    60. Kee H. Chung & John Elder & Jang‐Chul Kim, 2013. "Liquidity and Information Flow around Monetary Policy Announcement," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(5), pages 781-820, August.
    61. Hasan, Iftekhar & Wu, Qiang & Zhang, Hao & Hoi, Chun-Keung (Stan), 2014. "Beauty is in the eye of the beholder: The effect of corporate tax avoidance on the cost of bank loans," Bank of Finland Research Discussion Papers 3/2014, Bank of Finland.
    62. Douglas O. Cook, 2004. "On the Timing and Execution of Open Market Repurchases," The Review of Financial Studies, Society for Financial Studies, vol. 17(2), pages 463-498.
    63. Leland, Hayne E & Pyle, David H, 1977. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Journal of Finance, American Finance Association, vol. 32(2), pages 371-387, May.
    64. Barclay, Michael J. & Smith, Clifford Jr., 1988. "Corporate payout policy : Cash Dividends versus Open-Market Repurchases," Journal of Financial Economics, Elsevier, vol. 22(1), pages 61-82, October.
    65. Christine Parlour & Guillaume Plantin, 2008. "Loan Sales and Relationship Banking," Post-Print hal-03415832, HAL.
    66. Ekkehart Boehmer & Charles M. Jones & Xiaoyan Zhang, 2013. "Shackling Short Sellers: The 2008 Shorting Ban," The Review of Financial Studies, Society for Financial Studies, vol. 26(6), pages 1363-1400.
    67. Maskara, Pankaj K. & Mullineaux, Donald J., 2011. "Information asymmetry and self-selection bias in bank loan announcement studies," Journal of Financial Economics, Elsevier, vol. 101(3), pages 684-694, September.
    68. Chordia, Tarun & Roll, Richard & Subrahmanyam, Avanidhar, 2008. "Liquidity and market efficiency," Journal of Financial Economics, Elsevier, vol. 87(2), pages 249-268, February.
    69. Preece, Dianna & Mullineaux, Donald J., 1996. "Monitoring, loan renegotiability, and firm value: The role of lending syndicates," Journal of Banking & Finance, Elsevier, vol. 20(3), pages 577-593, April.
    70. Loughran, Tim & Schultz, Paul, 2005. "Liquidity: Urban versus rural firms," Journal of Financial Economics, Elsevier, vol. 78(2), pages 341-374, November.
    71. Vivian W. Fang & Xuan Tian & Sheri Tice, 2014. "Does Stock Liquidity Enhance or Impede Firm Innovation?," Journal of Finance, American Finance Association, vol. 69(5), pages 2085-2125, October.
    72. repec:bla:jfinan:v:58:y:2003:i:2:p:921-938 is not listed on IDEAS
    73. Miller, James M. & McConnell, John J., 1995. "Open-Market Share Repurchase Programs and Bid-Ask Spreads on the NYSE: Implications for Corporate Payout Policy," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 30(3), pages 365-382, September.
    74. Cook, Douglas O. & Schellhorn, Carolin D. & Spellman, Lewis J., 2003. "Lender certification premiums," Journal of Banking & Finance, Elsevier, vol. 27(8), pages 1561-1579, August.
    75. Joel Hasbrouck, 2009. "Trading Costs and Returns for U.S. Equities: Estimating Effective Costs from Daily Data," Journal of Finance, American Finance Association, vol. 64(3), pages 1445-1477, June.
    76. Chung, Huimin, 2006. "Investor protection and the liquidity of cross-listed securities: Evidence from the ADR market," Journal of Banking & Finance, Elsevier, vol. 30(5), pages 1485-1505, May.
    77. Balachandran, Balasingham & Faff, Robert & Theobald, Michael & van Zijl, Tony, 2012. "Rights Offerings, Subscription Period, Shareholder Takeup, and Liquidity," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 47(1), pages 213-239, February.
    78. Kang, Jun-Koo & Liu, Wei-Lin, 2008. "Bank incentives and suboptimal lending decisions: Evidence from the valuation effect of bank loan announcements in Japan," Journal of Banking & Finance, Elsevier, vol. 32(6), pages 915-929, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Stereńczak Szymon & Kubiak Jarosław, 2023. "The choice of external financing source: The role of company size and stock liquidity," Economics and Business Review, Sciendo, vol. 9(3), pages 44-65, October.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Craig W. Holden & Stacey Jacobsen & Avanidhar Subrahmanyam, 2014. "The Empirical Analysis of Liquidity," Foundations and Trends(R) in Finance, now publishers, vol. 8(4), pages 263-365, December.
    2. Pham, Mia Hang, 2020. "In law we trust: Lawyer CEOs and stock liquidity," Journal of Financial Markets, Elsevier, vol. 50(C).
    3. Nadarajah, Sivathaasan & Duong, Huu Nhan & Ali, Searat & Liu, Benjamin & Huang, Allen, 2021. "Stock liquidity and default risk around the world," Journal of Financial Markets, Elsevier, vol. 55(C).
    4. Roy, Partha P. & Rao, Sandeep & Zhu, Min, 2022. "Mandatory CSR expenditure and stock market liquidity," Journal of Corporate Finance, Elsevier, vol. 72(C).
    5. Ali, Searat & Liu, Benjamin & Su, Jen Je, 2017. "Corporate governance and stock liquidity dimensions: Panel evidence from pure order-driven Australian market," International Review of Economics & Finance, Elsevier, vol. 50(C), pages 275-304.
    6. Michael, Michael & Ali, Muhammad Jahangir & Atawnah, Nader & Muniandy, Balachandran, 2022. "Fiduciary or loyalty? Evidence from top management counsel and stock liquidity," Global Finance Journal, Elsevier, vol. 52(C).
    7. Atawnah, Nader & Balachandran, Balasingham & Duong, Huu Nhan & Podolski, Edward J., 2018. "Does exposure to foreign competition affect stock liquidity? Evidence from industry-level import data," Journal of Financial Markets, Elsevier, vol. 39(C), pages 44-67.
    8. Nyborg, Kjell & Wang, Zexi, 2019. "Corporate cash holdings: Stock liquidity and the repurchase motive," CEPR Discussion Papers 13791, C.E.P.R. Discussion Papers.
    9. Gorton, Gary & Winton, Andrew, 2003. "Financial intermediation," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 8, pages 431-552, Elsevier.
    10. Godlewski, Christophe J., 2014. "Bank loans and borrower value during the global financial crisis: Empirical evidence from France," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 28(C), pages 100-130.
    11. Nyborg, Kjell & Wang, Zexi, 2013. "Stock Liquidity and Corporate Cash Holdings," CEPR Discussion Papers 9535, C.E.P.R. Discussion Papers.
    12. Nyborg, Kjell G. & Wang, Zexi, 2021. "The effect of stock liquidity on cash holdings: The repurchase motive," Journal of Financial Economics, Elsevier, vol. 142(2), pages 905-927.
    13. Chia, Yee-Ee & Lim, Kian-Ping & Goh, Kim-Leng, 2020. "Liquidity and firm value in an emerging market: Nonlinearity, political connections and corporate ownership," The North American Journal of Economics and Finance, Elsevier, vol. 52(C).
    14. Fungáčová, Zuzana & Godlewski, Christophe J. & Weill, Laurent, 2020. "Does the type of debt matter? Stock market perception in Europe," The Quarterly Review of Economics and Finance, Elsevier, vol. 75(C), pages 247-256.
    15. Chen, Jiayuan & Gong, Di & Muckley, Cal, 2020. "Stock market illiquidity, bargaining power and the cost of borrowing," Journal of Empirical Finance, Elsevier, vol. 58(C), pages 181-206.
    16. Li, Chunshuo & Ongena, Steven, 2015. "Bank loan announcements and borrower stock returns before and during the recent financial crisis," Journal of Financial Stability, Elsevier, vol. 21(C), pages 1-12.
    17. Chia, Yee-Ee & Lim, Kian-Ping & Goh, Kim-Leng, 2020. "More shareholders, higher liquidity? Evidence from an emerging stock market," Emerging Markets Review, Elsevier, vol. 44(C).
    18. Tianxi Wang, 2020. "Put Your Money Where Your Mouth Is: A Model of Certification with Informed Finance," International Review of Finance, International Review of Finance Ltd., vol. 20(2), pages 323-349, June.
    19. Marks, Joseph M. & Shang, Chenguang, 2024. "Business seasonality and stock liquidity," Journal of Financial Markets, Elsevier, vol. 67(C).
    20. Andres, Christian & Cumming, Douglas & Karabiber, Timur & Schweizer, Denis, 2014. "Do markets anticipate capital structure decisions? — Feedback effects in equity liquidity," Journal of Corporate Finance, Elsevier, vol. 27(C), pages 133-156.

    More about this item

    Keywords

    Loans announcements; Stock liquidity; Transaction costs; Corporate decisions;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:116398. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.