The Wealth Effects of Bank Financing Announcements in Highly Leveraged Transactions

Authors

  • WILLIAM A. KRACAW,

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    • Smeal College of Business Administration, Pennsylvania State University, and Kenan-Flagler Business School, University of North Carolina at Chapel Hill, respectively. We thank Jennifer Conrad, Dave Denis, Robert Eisenbeis, Chris Muscarella, Henri Servaes, Dennis Sheehan, René Stulz (the editor), Michael Vetsuypens, Sunil Wahal, Ken Wiles, and an anonymous referee for their helpful comments and suggestions, Steve Kaplan for providing bank loan pricing data, and Jim Miller, Tod Perry, Carolyn Reichert, and Sunil Wahal for execellent research assistance. Earlier drafts of this article were completed while Kracaw was at Purdue University.

  • MARC ZENNER

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    • Smeal College of Business Administration, Pennsylvania State University, and Kenan-Flagler Business School, University of North Carolina at Chapel Hill, respectively. We thank Jennifer Conrad, Dave Denis, Robert Eisenbeis, Chris Muscarella, Henri Servaes, Dennis Sheehan, René Stulz (the editor), Michael Vetsuypens, Sunil Wahal, Ken Wiles, and an anonymous referee for their helpful comments and suggestions, Steve Kaplan for providing bank loan pricing data, and Jim Miller, Tod Perry, Carolyn Reichert, and Sunil Wahal for execellent research assistance. Earlier drafts of this article were completed while Kracaw was at Purdue University.


ABSTRACT

We analyze the effect of financing announcements of highly leveraged transactions (HLTs) on the stock prices of the banks that lead HLT-lending syndicates. For our sample of 41 HLTs, we document that the first HLT and bank financing announcements result in positive wealth effects for the lending banks. We also find that these wealth effects are lower in 1985, for smaller HLTs, and for banks with a high loan loss reserve to total asset ratio. Finally, we report that Leveraged Buyout (LBO) targets gain about 2 percent, whereas leveraged recap targets lose about 2 percent, when the first bank financing agreement is announced.

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