We would like to thank Shigeki Sakakibara, Kenya Fujiwara, Sandeep Dahiya (the referee), Jayant Kale (the editor), and seminar participants at Kobe University for their helpful comments. This research was supported by the Grants-in-Aid for Scientific Research from Japan Society for the Promotion of Science.
DEBT FORGIVENESS AND STOCK PRICE REACTION OF LENDING BANKS: THEORY AND EVIDENCE FROM JAPAN
Article first published online: 23 SEP 2010
© 2010 The Southern Finance Association and the Southwestern Finance Association
Journal of Financial Research
Volume 33, Issue 3, pages 267–287, Fall 2010
How to Cite
Isagawa, N., Yamaguchi, S. and Yamashita, T. (2010), DEBT FORGIVENESS AND STOCK PRICE REACTION OF LENDING BANKS: THEORY AND EVIDENCE FROM JAPAN. Journal of Financial Research, 33: 267–287. doi: 10.1111/j.1475-6803.2010.01271.x
- Issue published online: 23 SEP 2010
- Article first published online: 23 SEP 2010
We provide a simple model for analyzing how debt forgiveness affects the stock price of a lending bank. Our model shows that although debt forgiveness increases shareholder wealth of a bank in healthy financial condition, it decreases shareholder wealth of a bank in unhealthy financial condition. We empirically investigate the announcement effect of debt forgiveness on bank stock prices in Japanese markets. On average, lending banks experience a significant negative announcement effect with respect to debt forgiveness. Consistent with the prediction of the model, we find a negative relation between the announcement effect and the net bad loan ratio as a proxy of the unhealthiness of the financial condition of the bank.