《Are Banks Still Special when there is a secondary market for loan》.pdf

THE JOURNAL OF FINANCE • VOL. LXVII, NO. 5 • OCTOBER 2012 Are Banks Still Special When There Is a Secondary Market for Loans? AMAR GANDE and ANTHONY SAUNDERS∗ ABSTRACT Secondary market trading in loans elicits a significant positive stock price response by a borrowing firm’s equity investors. We find the major reason for this response is the alleviation of borrowing firms’ financial constraints. We also find that new loan announcements are associated with a positive stock price effect even when prior loans made to the same borrower already trade on the secondary market. We conclude that the special role of banks has changed due to their ability to create an active secondary loan market while simultaneously maintaining their traditional role as information producers. IT IS COMMONLY ARGUED that banks play a special role in the financial system because they resolve important information asymmetries. Theoretical models (e.g., Diamond (1984), Ramakrishnan and Thakor (1984), Fama (1985)) high- light the unique monitoring functions of banks, and show that banks have a comparative advantage, as well as enhanced incentives (relative to public debt holders), in monitoring debt contracts. However, the recent development of an active secondary market for loans could potentially diminish or significantly alter this special role.1 This study analyzes whether the development of the secondary market for bank loans has changed the special role of banks in the financial system, and if so, how. The past two decades have witnessed an increased commoditization of bank loans due to the development of structured finance products, such as commercial debt obligations (CDOs), and commercial loan obligations ∗Amar Gande