The Impact of Bank Loan Announcements on Stock Liquidity

Abstract

We examine the impact of bank loan announcements on stock liquidity. Using a comprehensive loan announcement sample over 14 years in Australia, we find that effective spreads and realized spreads of borrowers’ stocks fall after the announcements. The findings suggest these announcements send positive signals about borrowers to the market that increase liquidity provision and reduce transaction costs, leading to improved liquidity for borrowers’ stocks. This liquidity improvement is more pronounced following announcements of new loans than for loan renewals. Overall, our findings provide practical implications for firm managers in the financing decision-making process and market participants in trading strategy adjustment.