Does the Type of Debt Matter? Stock Market Perception in Europe

What is it about?

We compare the effect of syndicated loan and bond announcements on borrower’s stock price. We apply an event study methodology on a sample of companies from 17 European countries. Debt announcement generates a positive stock market reaction. The issuance of a loan exerts a significantly stronger reaction than does the issuance of a bond. We therefore support the hypothesis that loan issuance has a positive certification effect.

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Why is it important?

Our results have major implications for financing decisions of European companies. Issuing debt enhances shareholder wealth in Europe’s case, and firms should rely more on loans than bonds as debt financing instruments. The relatively better stock market reaction to loan issuance than bond issuance argues for expanding the syndicated loan market in European countries. However, implementation of the new Basel III banking regulatory framework may hamper bank lending and limit possibilities for loan use relative to bonds.