The Effect of Bank Reputation on the Value of Bank Loan Agreements

Abstract

I examine the effect of bank characteristics on changes in client firm value occasioned by bank loan announcements to assess the importance of commercial bank reputation. I find that valuation effects are positively related to bank deposit size and capital ratio, and inversely related to the loan loss provision ratio. The results imply that high-quality firms that need to raise external capital have an incentive to develop relationships with large, high-quality banks to avoid pooling with other bank loan customers or issuers of public securities. The results suggest that, despite regulation, the market does not view banks as a uniform set of suppliers of capital. Instead, in a manner consistent with previous empirical findings for auditing firms and investment bankers, variation among commercial banks facilitates the market's ability to differentiate among firms.