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Loan Announcement, Bank Monitoring and External Environment

Author: LvZuoZuo
Tutor: LuoRongHua
School: Southwestern University of Finance and Economics
Course: Finance
Keywords: loan announcement market reaction bank monitoring eventstudy
CLC: F275
Type: Master's thesis
Year: 2012
Downloads: 2
Quote: 0
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Although the capital market of China has developed rapidly, the financing structure of companies have not been changed essentially. As far as the listed companies which can take advantage of the capital market to diversify financing way and prefer equity financing, their bank loan amounts are still very large, basically more than half of their total debt. This shows that the bank loans play a vital role in company financing. Due to this special function, mutually promote relationship always exists between banks and companies. On the one hand, the banks will affect development of the enterprise through loosening or tightening credit capital; on the other hand, security of bank credit funds is closely connected with enterprise management condition. So the banks will carry out rigorous initial screening and lasting ex-post monitoring to lend money, in this point of view, the banks take more advantage of information than other investors. Therefore, if a enterprise gets the bank loan, at least, their prospects of development and financial situation should be reassured to the banks, and in order to ensure the safety of fund, the bank will conduct continual ex-post supervision after lending, which is helpful to improve system of external supervision to the borrowing enterprise, and to a certain extent reduces adverse selection and borrowers’moral hazard and, hence, the problem of information asymmetry.It has been widely researched among domestic and foreign scholars on supervisory role of the banks. Only involving the domestic, many articles indicate that the bank has some effects on supervision to the listed companies in China. This effect of supervision and the significant influence of bank loans will have a significant impact. So announcements of bank loan agreement of the listed company will lead to strong market reaction. At the same time, we also notice that bank credit funds will be affected by many macroeconomic policies, including tightness of monetary policy and different months etc. And the bank credit capital condition will affect its credit policy, including supervision and audit enforcement to borrowers. So, under different monetary policies and in different loans time, and then under the premise of different bank credit funds, what is different market reaction caused by announcement of listed company’s bank loans, and whether the differences can reflect identification of investors to effects of bank supervision to borrowing firms, which will be the focus of this paper.First of all, this thesis researches into the bank loan announcements of Chinese listed companies from2005to2010, and341valid samples are obtained from254listed firms guided by certain principle. Then traditional event-study method is applied according to Brownand Warner (1985) to investigate the effect of loan announcements on the market value of borrowers. The empirical results show that CARs (cumulative abnormal returns) in our sample bank loan announcements are negative. This enables us to evaluate events’impact on stock prices, and thus, the market reaction to loan announcements. This illustrates that Chinese investors regard this behavior of the company as a "bad" event in the short term, which is quite different from the relevant foreign empirical results. In addition, according to this research, CARs in the window [-8,-1](with t=0referring to the announcement date) are negative and significantly different from0, which shows the leakage of bank loan information during the pre-event period may exist in Chinese market.Secondly, after obtaining CARs of the listed companies’ bank loans announcement, to understand the source of this negative impact on stock prices, we focus on some variables that reflect the bank credit condition, and observe their impact to CARs, on the basis of controlling related variables of loan itself and borrowing companies. These variables are key factors that may greatly affect the market but had not been considered in previous studies. Through multiple linear regression analysis of CARs, the article attempts to find out some evidence to prove whether the investors have realized or accept banks’supervision to borrowing enterprises.Concrete analysis process as follows:on the one hand, the different monetary policies have an important impact on the Bank’s final credit decision-making. The bank loanable fund will reduce and become more cautious about each loan applications when central bank tightens monetary policy. All aspects of loan applicant will be more strictly investigated before lending, and in the post-loan, the bank will closely monitor business behavior of the borrower to ensure the safety of the loan. Thus, we can infer that, in a tight monetary policy period, the bank will increase the force of supervision to borrowing enterprise, so the difficulty that company obtain loan from the bank will be greater than in a loose monetary policy period. As a result, in a tight monetary policy period, bank loans announcement will cause more excess return; On the other hand, the different period of loans issue will also affect the enterprise share price’s excess return. Commercial Banks have a limited amount of the loans every year. Generally speaking, in the first half of the year, the bank loanable fund is usually abundant, relatively easy for companies to obtain loans; but in the second half, with the increasing of the scale of the loan has been released, the bank loanable fund will be more nervous. Banks will be more prudent to make every loan decision, and strengthen the examination and supervision to each loan applicants, so the difficulty that company obtain loan from the bank will be increased. Thus we can infer that, when more close to the end of the year, the excess return of loans announcement will be higher. In the above assumptions, this paper firstly selected the legal deposit reserve rate and inter-bank offered rate as a measure of monetary policy, and used the virtual variable to stand for loan announcement time, then carried out regression analysis to the event window of the accumulation excess returns, and inspected excess returns’change in different bank credit funds conditions. The results showed that the above three variables coefficients were the same with our assumptions basically, but significant level is not high.As the results above, further exploration should be paid attention on. Because of the complexity of monetary policy, the variables may not accurately agree with the tightness of monetary policy. In order to precisely describe monetary policy during the period of loans announcement, we should make a judgment in views of different factors. In this paper, according to official reports and specific operations of the central bank, the period of2005to the first half of2008and2010would be defined as monetary policy tightening period, the second half of2008to2009as monetary policy loose period. Moreover, the article does regression analysis on the excess return again by virtual variables to represent tightness of monetary policy. Test results show that excess return of the listed company caused by bank loans announcement in deflationary period were more than inflation period, which passed the significance test with confidence level at5%. Therefore, the conclusion perfectly confirmed our previous assumptions:under the premise that different monetary policies affect credit funds from banks, loan announcement result in more excess return in deflationary period, and to some extent, Chinese investors could identify the commercial Banks’supervisory role to borrowing enterprise.

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CLC: > Economic > Economic planning and management > Enterprise economy > Corporate Financial Management
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