Are Banks Still Special When There Is a Secondary Market for Loans?

Transcription

1 Are Banks Still Special When There Is a Secondary Market for Loans? The Journal of Finance, 2012 Amar Gande 1 and Anthony Saunders 2 1 The Edwin L Cox School of Business, Southern Methodist University 2 Stern School of Business, New York University 2013, July 12 BCG Lab Seminar presented by Junho Park 1 / 22

2 Starting Point Theories banks have a special role They resolve information asymmetries They have advantage and incentive to monitor debt contracts Real World Secondary loan market has been developed It causes trade-offs to banks and their borrowers Dilution of the monitoring incentive of banks Share of the risk with wider group of investors 2 / 22

3 Research Questions 1 What is the borrowing firm s stock price reaction on the first day of trading of its existing loans? 2 How shareholders benefit or lose from their loans being traded in the secondary loan market? 3 Is there any evidence that secondary market loan trading reduces or significantly alters key features of traditional bank specialness? 3 / 22

4 Main Results 1 There is a positive announcement effect on the borrower s stock price when a borrower s existing loans trade for the first time in the secondary market 2 Secondary loan market alleviates a firm s financial constraints 3 Negative abnormal bond returns and other evidence shows that the secondary market has significantly altered the nature of bank specialness 4 / 22

5 Bank Specialness and Loan Sales Review of Prior Studies On the special role of banks: Theoretical models highlight the monitoring function Diamond (1984), Ramakrishnan and Thakor (1984) Empirical researches find positive impact of bank loans On the liquidity of bank loans: Theoretically, bank loans is illiquid or lemons Pennacchi (1988) Empirically, stock return is negative for loan sales Dahiya, Puri and Saunders (2003) 5 / 22

6 The Growth of the Secondary Market for Loans Volume of Secondary Loan Market 6 / 22

7 Data and Sample Selection Sample Data Data from LSTA, LPC, CRSP, FISD, TRACE, YB and Compustat Daily data from 1999 to 2003 Secondary market loan price data are available from 1999 There exist alternative credit risk hedging markets after / 22

8 Secondary Market Loan Trading and Bank Specialness Is Loan Trading Valuable to Equity Investors? Value of Loan Trading to Equityholders Hypothesis 1 (Loan Trading) Secondary market trading in loans is valuable to equityholders of a borrowing firm Reasoning: 1 A loan sale could alleviate a firm s financial constraints 2 A loan sale would undermine the incentives of a bank to monitor, leading to opportunistic risk-shifting by shareholders at the expense of bondholders 3 A loan sale might lower the cost of capital by risk-sharing or increased liquidity 8 / 22

9 Secondary Market Loan Trading and Bank Specialness Channels of Value Benefit or Loss Additional Hypotheses Hypothesis 2 (Alleviation of Financial Constraints) Secondary market trading in loans is valuable to equityholders of a financially constrained borrowing firm Hypothesis 3 (Risk-Shifting) Equityholders of a borrowing firm have greater incentives to risk-shift due to reduced bank monitoring incentives, with a resultant wealth transfer from bondholders to equityholders in a borrowing firm Hypothesis 4 (Traditional Bank Specialness) Secondary market trading in loans reduces the traditional aspect of bank specialness 9 / 22

10 The Value of Loan Trading to Equity Holders Table 1: Cumulative Abnormal Stock Returns Event Window CAR at Loan Trading (%) Z-statistic Day 0 082*** 294 [ 1, 0] 124*** 327 [ 1, 1] 131*** 289 Benchmarks: Day 0: 068% by Billett, Flannery and Garfinkel (1995) [ 1, 0]: 032% by Best and Zhang (1993) 10 / 22

11 Alleviation of Financial Constraints Differences-in-differences framework Non-traded borrowers Traded borrowers Pre-loan sale year Dif Post-loan sale year Dif D-in-D, significant? Specifically, log (LOANS RECEIVED) = θ 0 + θ 1 TRADED + θ 2 POST TRADE + θ 3 TRADED POST TRADE + θ 4 log (TOTAL ASSETS) + θ 5 Q + ɛ t (1) Here, Q is a proxy for investment opportunity set 11 / 22

12 Alleviation of Financial Constraints Table 2: Loan Received by Borrowers Dependent Variable: log (LOANS RECEIVED) Variable Coefficient t-statistic INTERCEPT 096*** 1589 TRADED 045*** 736 POST TRADE POST TRADE TRADED 014** 226 log (TOTAL ASSETS) 060*** 6248 Q 003*** 263 Adjusted R Observations 38,498 Traded borrowers receive more loans after loan sales 12 / 22

13 Alleviation of Financial Constraints Table 3: Loans Received by Distressed Borrowers Dependent Variable: log (LOANS RECEIVED) Variable Coefficient t-statistic FINANCIALLY CONSTRAINED 024** 236 POST TRADE TRADED Adjusted R Observations 38,498 Impact of trading is stronger for financially constrained firms 13 / 22

14 Alleviation of Financial Constraints Table 4: Financial Leverage of Borrowers Increased loans could be used for refinance its existing debt We need to check the increase in leverage of borrowers Dependent Variable: LEVERAGE Variable Coefficient t-statistic POST TRADE TRADED 008*** 589 Adjusted R Observations 37,859 Additional loans could help to alleviate financial constraints 14 / 22

15 Alleviation of Financial Constraints Table 5: Alleviation of Financial Constraints by Loan Sales Check whether cash flow sensitivity of investment is lower Investment (I ), capital (K) and cash flow (CF) Dependent Variable: I /K Variable Coefficient t-statistic CF/K 0103*** 679 CF/K POST TRADE 0056*** 367 Adjusted R Observations 5,743 Investment is less sensitive to cash flow after loan sales 15 / 22

16 Alleviation of Financial Constraints Table 7: Analysis of Cumulative Abnormal Returns Examine whether positive abnormal returns can be explained Dependent Variable: CAR[ 1, 0] Variable Coefficient t-statistic DISTRESSED 965*** 264 Adjusted R Observations / 22

17 Alleviation of Financial Constraints Endogeneity Problem Selection Bias Scenario 1 Firm finds a valuable investment opportunity 2 Maybe only way a bank can fund the project is loan sale 3 Hence, the market view the loan sales as positive news Two-Stage Regression (Instrument Variable Method) Endogenous variable: TRADED Instrument variables: NUMBER OF COVENANTS, log (LOAN SIZE) and SYNDICATED LOAN Drucker and Puri (2009) 17 / 22

18 Alleviation of Financial Constraints Table 8: Controlling for Self-Selection First-stage result and rule of thumb indicate that instruments are not weak Second Stage, Dependent Variable: CAR[ 1, 0] Variable Coefficient t-statistic DISTRESSED 982*** 502 Adjusted R Observations 302 The result is robust to endogeneity problem 18 / 22

19 Risk-Shifting by Shareholders of Borrowing Firms Table 9: Cumulative Abnormal Bond Returns There is wealth transfers from bondholders to equtiyholders by undermined bank monitoring incentives Event Window CAR at Loan Trading (%) Z-statistic Panel A: Full sample (N = 137) Day 0 048** 216 [ 1, 0] 012** 196 [ 1, 1] Panel B: Distressed (N = 31) Day 0 177*** 336 [ 1, 0] 123*** 4/56 [ 1, 1] 134** 346 Secondary market could lead to reduction of bank specialness 19 / 22

20 Traditional Bank Specialness and Loan Trading Table 10: Average Loan Announcement Effects If investors anticipate reduction of bank specialness, loan announcement will be negative CAR at Loan Announcement (%) Z-statistic Panel A: First-trade loans (N = 314) Day 0 046** 205 [ 1, 0] 099*** 277 [ 1, 1] 141*** 344 Panel B: Post-trade loans (N = 31) Day 0 018*** 291 [ 1, 0] 021*** 258 [ 1, 1] 041*** 378 Little reduction of bank specialness in short term Significant reduction of bank specialness in long term 20 / 22

21 Traditional Bank Specialness and Loan Trading Table 11: Analysis of CAR at Loan Announcement Dependent Variable: CAR[ 1, 0] Variable Coefficient t-statistic POST TRADE 139** 222 Adjusted R Observations 1,238 Secondary market undermines the bank specialness There are two sides effect of secondary market Beneficial effect of newly developing specialness Weakening of traditional bank specialness 21 / 22

22 Conclusion Summary Secondary loan trade market is valuable to equityholders Especially for financially constrained borrowers By the wealth transfer from debtholders to equityholders Secondary market undermines traditional bank specialness Banks lose incentive to monitor borrowers But banks still maintain their specialness Banks as being special along two distinct dimensions Information producers and monitors, traditional view Creator of active secondary market, beneficial for borrowers 22 / 22