Market Reactions When Zero-Leverage Firms Obtain Bank Finance

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Prior studies of bank loan announcements depict significant capital market reactions. More recent evidence however, fails to identify such reactions (Fields et al. 2006, Maskara & Mullineaux 2011). In this study, we consider market reactions to loan initiations where the borrower has no prior record of bank lending. Zero-leverage firms are firms that have zero outstanding short-term or long-term debt in their capital structure (Strebulaev & Yang 2013). Using a unique hand collected sample of bank loan announcements for Australian Mining Development Stage entities, we find that both initial bank loans and subsequent bank loans attract significant market reactions. Further, we produce evidence consistent with announcements of such loans reducing information asymmetry which we proxy for with bid-ask spreads and trading volume. Our final analysis examines evidence of bank specialisation. We find that borrowers from the industry leader in terms of loan origination (Macquarie Bank) in this sector exhibit stronger abnormal returns.
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