Bank Borrowers and Loan Sales: New Evidence on the Uniqueness of Bank Loans
July 2000
Sandeep Dahiya, Manju Puri, and Anthony Saunders
ABSTRACT
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 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.
Subject: Banking
Sandeep Dahiya
Institution: McDonough School of Business, Georgetown University
Email: sd@msb.edu
Telephone: (202) 687 3832
Manju Puri
Institution: Graduate School of Business, Stanford University
Email: mpuri@gsb.stanford.edu
Telephone: (650) 723 3402
Anthony Saunders
Institution: Stern School of Business, New York University
Email: asaunder@stern.nyu.edu
Telephone: (212) 998-0711
Home Page: http://www.stern.nyu.edu/~asaunder
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