8/6/2019 shahzad malik

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Bank holding the primary deposit or lending relationship with an organization, normally a corporation witha multibank servicing agreement for its credit and cash management needs

A loan offered by a group of lenders (called a syndicate) who work together to provide funds for asingle borrower. The borrower could be a corporation, a large project, or a sovereignty (such as agovernment). The loan may involve fixed amounts, a credit line, or a combination of the two.Interest rates can be fixed for the term of the loan or floating

In syndicated loans, there are two layers of information asymmetry. The first layer is

between lead bank and syndicate participants (Simons, 1993), and the second one is

between (groups of) lenders and rating agencies Since there are three types of agents(lead bank, participant banks, and the rating agencies) monitoring the same borrower, we

believe this situation provides a unique opportunity to test the value of private

information, that is, the role of lead banks.

Null hypothesis A high-quality lead bank does not mitigate the negativeEquity market reaction associated with the bank loan rating

announcements

Alternative hypothesis. A high-quality lead bank mitigates the negative equitymarket reaction associated with the bank loan rating announcements

Several variables are used as proxies effective and efficient bank monitoring, or bankquality or reputation. Size is a common proxy variable for reputation or quality. larger

banks have greater incentives to monitor and can more efficiently monitor available

resources. Bank size should have a positive effect on the banks borrowers equity

returns, as these borrowers are monitored by banks that are motivated to monitoreffectively and efficiently in order to maintain their own reputation. Another proxy of

bank quality is bank growth rate. It is used to capture a banks risk

fast growth can be dangerous because profitability may not grow with asset size, or theperceived risk may increase relative to earnings and thus reduce the share value. A banks

profitability is another proxy variable for its reputation. Stover (1996) finds that

profitability has a positive relationship with a banks quality

Empirical resultsThese results support the hypothesis that larger lenders are more effective in monitoring

their borrowers, and mitigate the negative impact occurring on the borrowersFor the variable banks growth rate in total assets, the group with fast-growing lenders

has unexpectedly less negative returns (three-day CAAR 22.28 percent) than the one with

slow-growing lenders (three-day CAAR 24.02 percent). The difference is not significant,

which does not support the hypothesis made for this variable.For the variable bank profitability, the group with high-profitable banks is associated

with much less negative abnormal returns as expected (three-day CAAR 20.66 percent),

while the group associated with low-profitable banks has three-day CAAR24.12 percent.The difference between these two groups is significant at the 5 percent level, which

supports the hypothesis that firms borrowing from highlyprofitable lenders mitigate the negative reaction to negative placement of bank loanratings