Bank incentives and suboptimal lending decisions: Evidence from the valuation effect of bank loan announcements in Japan |
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Authors: | Jun-Koo Kang Wei-Lin Liu |
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Affiliation: | 1. Department of Finance, The Eli Broad College of Business, Michigan State University, East Lansing, MI 48824-1121, United States;2. Division of Banking and Finance, Nanyang School of Business, Nanyang Technological University, Singapore, Singapore |
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Abstract: | Using a sample of bank loan announcements in Japan, we examine whether or not banks have incentives to engage in suboptimal lending that results in wealth transfer from the banks to the borrowing firms. We find that abnormal returns for borrowing firms are significantly positive, but those for lending banks are sometimes significantly negative. Furthermore, the announcement returns for borrowing firms are negatively related to those for lending banks, especially when poorly performing firms borrow from financially healthy (low-risk) banks. Our results suggest that the positive valuation effect of bank loan announcements for borrowing firms is mainly due to a wealth transfer from lending banks. |
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Keywords: | G21 G28 G32 |
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