Academic journal article Academy of Banking Studies Journal

The Effect of Resale Constraints on Abnormal Returns of Borrowers in Syndicated Loans

Academic journal article Academy of Banking Studies Journal

The Effect of Resale Constraints on Abnormal Returns of Borrowers in Syndicated Loans

Article excerpt


We study the relationship between various loan characteristics and abnormal returns to client firms subsequent to commercial bank loans. Using a sample of 1,472 syndicated loans, we find that constraints on loan resale are predictive of short-run abnormal returns. Specifically, we find a negative relation between borrower consent constraints and short-run returns, while agent consent constraints actually appear to foster higher returns, particularly for issues with positive event performance. Our results are consistent with the notion that resale constraints are in place to mitigate potential financial distress, as well as to help facilitate relationships.


Mickelson and Partch (1986) and James (1987) were among the first to document that banks appear to be "unique" as compared to other lenders in their impact on a firm's performance subsequent to a loan. Specifically, other types of financing have been known to lower average stock prices. For example, Asquith and Mullins (1986), Masulis and Korwar (1986), and Bayless and Chamlinsky (1996) have shown that SEO announcements result in an average decline of 2-3%. Further, Eckbo (1986) and Howton, Howton, and Perfect (1988) find that announcements of public bond issues generate zero or negative returns. However, commercial bank loans have been shown to generate positive abnormal returns for client firms around the announcement date. The traditional notion has been that banks are generally considered insiders and may enhance firm value by monitoring performance and reducing information asymmetries (see Fama, 1985; Berlin and Loeys, 1988; and Lwan and Carleton, 1998).

Whereas previous studies examine all bank loans as a single group, implicitly assuming equality in underlying contract characteristics, we address the uniqueness question from a different perspective, considering the possibility that some bank loans are "more unique" than others. To examine this issue, we study particular characteristics of syndicated loan contracts in an effort to determine whether banks are predicting abnormal returns via details within the contract. Specifically, we look at the length, size, and spread of the loan, as well as certain constraints placed upon loan resale. These constraints can take two forms: (1) a minimum size of resale constraint or (2) an explicit consent constraint, requiring either the borrower or the lender (agent) to give permission for pieces of the loan to be sold in the secondary market.

Mullineaux and Pyles (2006) examine the motivation behind the consent constraints, providing two possible suggestions for their existence. First, the constraints may serve as a device to mitigate financial distress, particularly as it relates to debt restructuring. This motivation suggests that constrained debt may be associated with lower abnormal returns subsequent to the loan announcement, as the constraints may signal a higher probability of default. Second, Mullineaux and Pyles (2006) also suggest the constraints, particularly the agent constraint, may serve to facilitate relationship building, as it effectively "locks-in" the members of the syndicate, at least to a certain extent. This latter motivation is suggestive of enhanced value, thereby implying a potentially positive relation between agent constraints and abnormal returns.

Using syndicated loan contracts active from January 1, 1998, to December 31, 2000, we find that the minimum size of resale constraint is generally not predictive in regards to abnormal announcement returns, as is the case with the size of the loan, the number of lenders, the length of the loan, and the spread of the loan. This seems to indicate that if the loan contracts are indirectly telling us something about the returns of client firms, it comes primarily in the form of loan consent constraints, of which there is little understanding or acknowledgment. We therefore seek to identify the different natures of the two consent constraints. …

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