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Are Banks Still Special? New Evidence on Their Role in the Corporate Capital‐Raising Process

Are Banks Still Special? New Evidence on Their Role in the Corporate Capital‐Raising Process Bankers appear to play a special role in providing commitment‐based financing to corporations. This type of lending is important not only for small firms that lack access to public debt markets but for large and medium‐size companies as well. For such companies, commitment‐based financing provides access to debt capital that becomes valuable when the firm has an immediate need for funding but interest rates in public debt markets are prohibitively high, or the firm is undervalued by the market. A good example of this was provided by the Asian crisis in the last quarter of 1998, when $10 billion of commercial paper was retired and $20 billion of net new commercial loans were booked. The authors also suggest that the fact that commitment‐based financing is used by larger companies when they believe themselves to be undervalued in the market is probably the best explanation of why announcements of these types of loans elicit a positive stock price reaction. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Applied Corporate Finance Wiley

Are Banks Still Special? New Evidence on Their Role in the Corporate Capital‐Raising Process

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References (10)

Publisher
Wiley
Copyright
Copyright © 2000 Wiley Subscription Services, Inc., A Wiley Company
ISSN
1078-1196
eISSN
1745-6622
DOI
10.1111/j.1745-6622.2000.tb00041.x
Publisher site
See Article on Publisher Site

Abstract

Bankers appear to play a special role in providing commitment‐based financing to corporations. This type of lending is important not only for small firms that lack access to public debt markets but for large and medium‐size companies as well. For such companies, commitment‐based financing provides access to debt capital that becomes valuable when the firm has an immediate need for funding but interest rates in public debt markets are prohibitively high, or the firm is undervalued by the market. A good example of this was provided by the Asian crisis in the last quarter of 1998, when $10 billion of commercial paper was retired and $20 billion of net new commercial loans were booked. The authors also suggest that the fact that commitment‐based financing is used by larger companies when they believe themselves to be undervalued in the market is probably the best explanation of why announcements of these types of loans elicit a positive stock price reaction.

Journal

Journal of Applied Corporate Finance – Wiley

Published: Mar 1, 2000

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