Bank Loans as a Financial Discipline: A Direct Agency Cost of Equity Perspective

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Description:

In a 2004 study, Harvey, Lin and Roper argue that debt makers with a commitment to monitoring can create value for outside shareholders whenever information asymmetry and agency costs are pronounced. I investigate Harvey, Lin and Roper's claim for bank loans by empirically testing the effect of information asymmetry and direct agency costs on the abnormal returns of the borrowers' stock around the announcement of bank loans. I divide my study into two main sections. The first section tests whether three proxies of the direct agency costs of equity are equally significant in measuring the direct costs associated with outside equity agency problems. I find that the asset utilization ratio proxy is the most statistically significant proxy of the direct agency costs of equity using a Chow F-test statistic. The second main section of my dissertation includes and event study and a cross-sectional analysis. The event study results document significant and positive average abnormal returns of 1.01% for the borrowers' stock on the announcement day of bank loans. In the cross sectional analysis of the borrowers' average abnormal stock returns, I find that higher quality and more reputable banks/lenders provide a reliable certification to the capital market about the low level of the borrowers' direct agency costs of equity and information asymmetry. This certification hypothesis holds only for renewed bank loans. In other words, in renewing the borrowers' line of credit, the bank/lender is actually confirming that the borrower has a low level of information asymmetry and direct costs of equity. Given such a certificate from the banks/lenders, shareholders reward the company/borrower by bidding the share price up in the capital market.

Creator(s): Hijazi, Bassem
Creation Date: December 2006
Partner(s):
UNT Libraries
Collection(s):
UNT Theses and Dissertations
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Total Uses: 302
Past 30 days: 4
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Publisher Info:
Publisher Name: University of North Texas
Place of Publication: Denton, Texas
Date(s):
  • Creation: December 2006
  • Digitized: April 22, 2008
Description:

In a 2004 study, Harvey, Lin and Roper argue that debt makers with a commitment to monitoring can create value for outside shareholders whenever information asymmetry and agency costs are pronounced. I investigate Harvey, Lin and Roper's claim for bank loans by empirically testing the effect of information asymmetry and direct agency costs on the abnormal returns of the borrowers' stock around the announcement of bank loans. I divide my study into two main sections. The first section tests whether three proxies of the direct agency costs of equity are equally significant in measuring the direct costs associated with outside equity agency problems. I find that the asset utilization ratio proxy is the most statistically significant proxy of the direct agency costs of equity using a Chow F-test statistic. The second main section of my dissertation includes and event study and a cross-sectional analysis. The event study results document significant and positive average abnormal returns of 1.01% for the borrowers' stock on the announcement day of bank loans. In the cross sectional analysis of the borrowers' average abnormal stock returns, I find that higher quality and more reputable banks/lenders provide a reliable certification to the capital market about the low level of the borrowers' direct agency costs of equity and information asymmetry. This certification hypothesis holds only for renewed bank loans. In other words, in renewing the borrowers' line of credit, the bank/lender is actually confirming that the borrower has a low level of information asymmetry and direct costs of equity. Given such a certificate from the banks/lenders, shareholders reward the company/borrower by bidding the share price up in the capital market.

Degree:
Level: Doctoral
Discipline: Finance
Language(s):
Subject(s):
Keyword(s): bank loans | direct agency costs | information asymmetry | certification hypothesis
Contributor(s):
Partner:
UNT Libraries
Collection:
UNT Theses and Dissertations
Identifier:
  • OCLC: 127119062 |
  • ARK: ark:/67531/metadc5411
Resource Type: Thesis or Dissertation
Format: Text
Rights:
Access: Use restricted to UNT Community
License: Copyright
Holder: Hijazi, Bassem
Statement: Copyright is held by the author, unless otherwise noted. All rights reserved.