A Study On The Paradox Of Loan Notice Effect And Its Impact On Stock Price

In China, the financial system is led by banks, and companies mainly rely on bank loans for financing. Because of the uncompetitive environment of the Chinese banking system (the big four state-owned banks dominating the market, great government influence on banking, etc.), and the multi-purpose of political and social reasons that banks have to serve under government control, commercial banks make their lending decisions not based on the corporate’s profitability and capability to repay loans in the future, but rather company’s relationship with the government and the firm’s social background. Firms with low profitability are more prone to get loans from banks, which imply a distortion in the Chinese loan market.In this dissertation, by means of event study method, we examine the ROA’s and ROE’s of listed companies (before and after getting the loan), have a longitudinal and horizontal (adjusted by industry median and mean) comparison, and find that in the long term, the borrower has a poorer subsequent performance after getting the loan.By investigating cumulative abnormal return (CAR) on different time span of event window, it is found that there is a significant negative cumulative abnormal return for the sample, and the magnitude of negative market responses is larger than the matching sample. This negative event study responses indicate that the market interprets the loan announcement as bad news and reacts negatively for bank loan announcements. The results are robust in both parametric and non-parametric tests.We also conduct a cross-sectional regression analysis. The results suggest that negative event study responses occur at bank loan announcements, especially for firms with a declining ROA and those rely heavily on external financing. This negative market reaction can also be observed during periods when liquidity is relatively tight in the financial market.In conclusion, in the Chinese transitional financial market, there still exists certain difficulty for investors to interpret news and the information asymmetry problem cannot be mitigated by intermediating institutions such as banks, the market has a negative response towards bank loan announcements.