An analysis of bank stock price reaction to distressed borrowers: Taiwanese evidence

This paper investigates the impacts of a borrower's reorganisation plan confirmation on its lending bank's shareholder wealth. Earlier empirical research is completely silent on this research area. Using data from a sample of Taiwanese reorganised firms, this paper shows that the market discriminates among lending banks by making inferences based on their exposure to their reorganised borrower; that is, the lead lending banks experience negative wealth effects, whereas the second lending banks experience positive effects. The results also show that wealth effects are negatively related to loan collateral and rates charged on the loans as well as on corporate leverage. In addition, the reliability and robustness of the model are demonstrated by the receiver operating characteristic curves.