Bank Loans and Bubbles : How Informative are the Announcements ?

This paper examines the reporting of bank loans in the financial press during the 2004-2007 period. More specifically, it uses a unique hand-collected data set to examine the frequency and determinants of loan reporting. The motivation is double folded. First, virtually all publicly traded firms borrow from banks. However, despite their widespread use, the reporting of bank loan agreements in the financial press is historically associated with a positive share price reaction. Furthermore, this investor reaction has been interpreted as evidence of bank certification or “specialness”. However, historical work on the specialness of bank loans considers only loans that are reported in the press, although the subset of press reported loans and borrowers could arguably differ from the subset of non-reported loans and borrowers. Second, changes in the frequency and determinants of bank reporting during bubbles could arguable be evidence of the financial press being caught in the frenzy and the announcements being less informative. Overall, results show that the frequency of loan reporting in the press significantly increased, practically doubled the historical 22% reporting frequency, during the 2004-2007 bubble period. However, reported loans and borrowers are still significantly different from non-reported ones. Reported loans have longer maturities, and reported borrowers present lower operating cash flows during the year preceding loan activation. Following the activation of the loans, reported borrowers present decreasing debt/EBITDA ratios. This suggests that loan new articles during the most recent bubble are still noteworthy and to some extent informative about the borrowers.