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Title: Bank lending to large companies : a test of whether banks obtain inside information
Author: Armitage, S. E.
Awarding Body: University of Edinburgh
Current Institution: University of Edinburgh
Date of Award: 1995
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This thesis reviews the theory and evidence on bank lending to companies and uses an event study to test the hypothesis that banks obtain inside information about borrowers. The argument is that a stock market response to announcements concerning bank loans indicates that banks do obtain inside information, which is signalled by the announcements. US event study evidence supports the information hypothesis for smaller quoted companies but not larger ones. This study is the first to use UK data and the results show less response to loan announcements than in the USA, which is consistent with other evidence that banks in the UK do not, as a rule, obtain inside information about large borrowers. It is important to test the information hypothesis because the established view of the rationale for bank lending assumes that it is true. There are several reasons why more information would give banks an advantage and enable both the average cost of their loans to be lower and the cost of each loan to reflect the risk of the borrower more accurately. But as the evidence indicates that banks do not have an information advantage for large borrowers, it is suggested that their lending in these cases is better explained by the service and commitment they can offer and by their capacity to negotiate with companies in difficulties. Bond investors are as well informed as banks but are not organised to cope with bad debts, which explains why the eurobond market is restricted to very safe issuers. This is believed to be the main factor limiting the development of markets in corporate debt. The thesis includes a brief history of the financing of business in the UK which establishes that securities markets have been an important source of funds for quoted companies since the 1920s and that banks have not been involved in corporate management or ownership since the mid nineteenth century. There is also a comprehensive review of event study methods which demonstrates their surprising diversity and justifies the choice of method for this study, which is believed to be the first in the UK to use daily data throughout.
Supervisor: Not available Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available