Market reaction to corporate loan announcements and mergers of financial institutions

Abstract

In this thesis, we conduct three empirical studies examining market response to corporate loan announcements in Canada, the relationship between lender environmental liability and bank loan announcements, and the market response to announcements of mergers of Canadian financial institutions. The first study validates the key results of prior -dies of bank loan announcement effects using a mmmon data set drawn fiom the Canadian capital market. Announcements of bank loans are associated with positive abnormal returns significantly higher than for private placements . Announcement effects are most pronounced when monitoring is most intense and when an announcement signals that the bank's private information is favorable. Conclusions of prior studies on bank loan announcements, conducted exclusively on US. data, are robust for a different banking system. The second study re-examines loan announcement effects to establish a relationship with environmental liability . We find that the market reaction to the announcement of bank debt to "environmental" firms is more positive and significant than for those "non-environmental" firms. This @lies that, for firms with exposure to environmental hazards, the announcement of bank debt is "extra good news". Within the class of "environmental" firms, the market reaction to announcements by firms in industries with a higher likelihood of experiencing spill events is more positive and significant than for those with lower likelihood. This study provides further evidence on the 'uniqueness" of bank loans, by demonstrating the superior monitoring capacity that banks possess with respect to corporate borrowers that are exposed to environmental liability. The third study examines a sample of mergers of Canadian financial institutions to determine whether those mergers are value-enhancing. The overall results support the generality of findings of prior US. studies that the average abnormal return for both the acquiring and target firms is positive and statistically significant. This result suggests that acquisitions in the financial industry are, in Canada as elsewhere, driven by value-enhancing motivations. The study also shows that acquiring institutions' shareholders benefit more when the acquisition is of a similar type. Finally, we find that foreign acquisitions add less value for Canadian banks than do domestic ones.