Loan markets, financing expectations and stock performance

This thesis is composed of two essays on loan markets and one essay on financing expectations and stock performance. The first chapter provides a brief introduction to the three essays. Chapter 2 investigates how the secondary loan resale market feeds back and affects primary loan pricing. Chapter 3 examines the institutional loan market, a rapidly growing loan market segment that plays an increasingly important role in addressing corporate capital needs. Chapter 4 studies financing expectations and its impact on firms' short-term and long-term stock performance. The final chapter recaps the major results of the preceding papers.;While a number of studies have addressed the motivations for, and interrelationships among loan sales, bank risk and liquidity, little empirical consideration has been given to banks' selection of loans for sale or to how loan resales impact borrowers. Chapter 2 seeks to fill this gap. Empirical tests are conducted using loans issued to U.S. firms, and the data sources include the Dealscan Loan Database, Secondary Mark-to-Market Loan Pricing Services, Compustat, and CRSP. The results suggest that shedding lower quality loans features prominently as a motive for secondary loan sales. Furthermore, a strong positive association is revealed between the ex ante probability of loan resales and the primary market loan spread. A change in the probability of loan resales from zero to one hundred percent elicits an increase in the primary loan spread of approximately 100 basis points, causing an adverse effect on borrowers. We conclude that loan resales represent a negative-information event and speculate that some of this negative impact results from the reduced monitoring efforts associated with a loan resale.;A recent innovation in the syndicated loan market has been the arrival of institutional investors, including hedge funds, hybrid funds and collateralized loan/debt obligation (CLD/CLO) managers. Chapter 3 focuses on the institutional loan market, an area of little prior empirical research, and finds that institutional loans have higher mean primary yield spreads (about 50bps) than bank loans, ceteris paribus. Moreover, institutional loans behave differently than bank loans on the secondary market, as evidenced by higher first trading day return, greater price volatility, higher liquidity, and a shorter holding period by their original lenders. Following information-based theories in the IPO literature (Rock (1986), and Chemmanur (1993) among others), we conjecture that the higher yield on institutional loans serves as compensation for attracting sufficient demand and for continuous participation of less informed investors.;Chapter 4 examines the impact of financing expectations on firms' short-run and long-run stock performance. Ex ante financing expectations reflect aggregate market beliefs about which financing vehicle firms will choose. We classify firms based on the likelihood of those choices, labeling those firms with high ex ante probability of issuing equity, "equity-type" firms, and those with a higher propensity of choosing debt, "debt type" firms. We conjecture that market reaction to equity (debt) issues not only differs across securities, but also across firms with different financing expectations. The results suggest that "equity-type" firms have more negative average announcement returns than do "debt-type" firms. Further, the results reveal that the widely-documented 'long-run underperformance puzzle' is largely driven by "equity-type" firms which experience a dramatic stock price run-up during the pre-issue period. It appears that equity timing could be a driving force underlying firms' financing decisions.