Initial bank loans, zero-leverage firms and stock market liquidity

New empirical evidence from the UK

Sijia Zhang, Andros Gregoriou

Research output: Contribution to journalArticleResearchpeer-review

Abstract

Purpose: The purpose of this paper is to examine stock market reactions and liquidity effects following the first bank loan announcement of zero-leverage firms. Design/methodology/approach: The authors use an event studies methodology in both a univariate and multivariate framework. The authors also use regression analysis. Findings: Using a sample of 96 zero-leverage firms listed on the FTSE 350 index over the time period of 2000–2015, the authors find evidence of a significant and permanent stock price increase as a result of the initial debt announcement. The loan announcement results in a sustained increase in trading volume and liquidity. This improvement continues to persist once the authors control for stock price and trading volume effects in both the short and long run. Furthermore, the authors examine the spread decomposition around the same period, and discover the adverse selection of the bid–ask spread is significantly related to the initial bank loan announcement. Research limitations/implications: The results can be attributed to the information cost/liquidity hypothesis, suggesting that investors demand a lower premium for trading stocks with more available information. Originality/value: This is the first paper to look at multiple industries, more than one loan and information asymmetry effects.

Original languageEnglish
Pages (from-to)1028-1051
Number of pages24
JournalJournal of Economic Studies
Volume46
Issue number5
DOIs
Publication statusPublished - 29 Aug 2019

Fingerprint

Stock market liquidity
Leverage
Announcement
Bank loans
Empirical evidence
Stock prices
Loans
Liquidity
Trading volume
Information asymmetry
Investors
Premium
Stock market reaction
Information costs
Design methodology
Debt
Short-run
Regression analysis
Liquidity effect
Event study methodology

Keywords

  • Bid–ask spreads
  • Information asymmetry
  • Initial bank loans
  • Liquidity
  • Price impact
  • Zero leverage

Cite this

@article{bcfbfe38734344feb77da9f47255aff9,
title = "Initial bank loans, zero-leverage firms and stock market liquidity: New empirical evidence from the UK",
abstract = "Purpose: The purpose of this paper is to examine stock market reactions and liquidity effects following the first bank loan announcement of zero-leverage firms. Design/methodology/approach: The authors use an event studies methodology in both a univariate and multivariate framework. The authors also use regression analysis. Findings: Using a sample of 96 zero-leverage firms listed on the FTSE 350 index over the time period of 2000–2015, the authors find evidence of a significant and permanent stock price increase as a result of the initial debt announcement. The loan announcement results in a sustained increase in trading volume and liquidity. This improvement continues to persist once the authors control for stock price and trading volume effects in both the short and long run. Furthermore, the authors examine the spread decomposition around the same period, and discover the adverse selection of the bid–ask spread is significantly related to the initial bank loan announcement. Research limitations/implications: The results can be attributed to the information cost/liquidity hypothesis, suggesting that investors demand a lower premium for trading stocks with more available information. Originality/value: This is the first paper to look at multiple industries, more than one loan and information asymmetry effects.",
keywords = "Bid–ask spreads, Information asymmetry, Initial bank loans, Liquidity, Price impact, Zero leverage",
author = "Sijia Zhang and Andros Gregoriou",
year = "2019",
month = "8",
day = "29",
doi = "10.1108/JES-05-2018-0190",
language = "English",
volume = "46",
pages = "1028--1051",
journal = "Journal of Economic Studies",
issn = "0144-3585",
number = "5",

}

Initial bank loans, zero-leverage firms and stock market liquidity : New empirical evidence from the UK. / Zhang, Sijia; Gregoriou, Andros.

In: Journal of Economic Studies, Vol. 46, No. 5, 29.08.2019, p. 1028-1051.

Research output: Contribution to journalArticleResearchpeer-review

TY - JOUR

T1 - Initial bank loans, zero-leverage firms and stock market liquidity

T2 - New empirical evidence from the UK

AU - Zhang, Sijia

AU - Gregoriou, Andros

PY - 2019/8/29

Y1 - 2019/8/29

N2 - Purpose: The purpose of this paper is to examine stock market reactions and liquidity effects following the first bank loan announcement of zero-leverage firms. Design/methodology/approach: The authors use an event studies methodology in both a univariate and multivariate framework. The authors also use regression analysis. Findings: Using a sample of 96 zero-leverage firms listed on the FTSE 350 index over the time period of 2000–2015, the authors find evidence of a significant and permanent stock price increase as a result of the initial debt announcement. The loan announcement results in a sustained increase in trading volume and liquidity. This improvement continues to persist once the authors control for stock price and trading volume effects in both the short and long run. Furthermore, the authors examine the spread decomposition around the same period, and discover the adverse selection of the bid–ask spread is significantly related to the initial bank loan announcement. Research limitations/implications: The results can be attributed to the information cost/liquidity hypothesis, suggesting that investors demand a lower premium for trading stocks with more available information. Originality/value: This is the first paper to look at multiple industries, more than one loan and information asymmetry effects.

AB - Purpose: The purpose of this paper is to examine stock market reactions and liquidity effects following the first bank loan announcement of zero-leverage firms. Design/methodology/approach: The authors use an event studies methodology in both a univariate and multivariate framework. The authors also use regression analysis. Findings: Using a sample of 96 zero-leverage firms listed on the FTSE 350 index over the time period of 2000–2015, the authors find evidence of a significant and permanent stock price increase as a result of the initial debt announcement. The loan announcement results in a sustained increase in trading volume and liquidity. This improvement continues to persist once the authors control for stock price and trading volume effects in both the short and long run. Furthermore, the authors examine the spread decomposition around the same period, and discover the adverse selection of the bid–ask spread is significantly related to the initial bank loan announcement. Research limitations/implications: The results can be attributed to the information cost/liquidity hypothesis, suggesting that investors demand a lower premium for trading stocks with more available information. Originality/value: This is the first paper to look at multiple industries, more than one loan and information asymmetry effects.

KW - Bid–ask spreads

KW - Information asymmetry

KW - Initial bank loans

KW - Liquidity

KW - Price impact

KW - Zero leverage

UR - http://www.scopus.com/inward/record.url?scp=85073189042&partnerID=8YFLogxK

U2 - 10.1108/JES-05-2018-0190

DO - 10.1108/JES-05-2018-0190

M3 - Article

VL - 46

SP - 1028

EP - 1051

JO - Journal of Economic Studies

JF - Journal of Economic Studies

SN - 0144-3585

IS - 5

ER -