Three types of fear play market uncertainty: evidence from bank loan

ABSTRACT

This research investigates whether the market sentiment influences firm stock returns with bank loan announcements. We find that CBOE Volatility Index (VIX) is positively related to cumulative abnormal returns, confirming VIX reflects the effect of loan announcements on the financial market. Results show that Financial and Economic Attitudes Revealed by Search (FEARS25) index without predictive power. Instead of that, the daily change of searching VIX (SVIX) of individual investors significantly capture the negative abnormal return before the loan announcements and cease as loan announcements occur. Our findings support that not only professional investors but also individual investors search on Google consider bank loan announcement as good news for borrowers.

KEYWORDS:

• Market uncertainty
• event study
• loan announcements
• volatility Index

JEL CLASSIFICATION:

• G14
• G21

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Both accidental and scheduled incidents lead the market uncertainty and significantly facilitates the impact on the performance of banks versus firms, for example, the political competition, climate change, and international business relation (Julio and Yook 2012; Francis, Hasan, and Zhu 2014).

² The findings also show that the characteristics of firms such as growth prospects, total and tangible assets, and characteristics of the owner such as net worth, experience, and education have significant effects with debt-equity decisions.

³ The burgeoning literature discusses the effect of uncertainty on the investors’ or firms’ decision-making (Baker, Bloom, and Davis 2016; Chen and Kieschnick 2018; Anginer, Cerutti, and Peria 2017; Fahling et al. 2018; Paligorova and Santos 2017; Pan 2018). There is abundant evidence of the effect of VIX on firm performance, but there has been much less discussion for the role of loan contracts. We examine whether VIX and FEARS index influence the firm performance by sentiment fluctuation of the market after the firm successfully obtains loan contracts (Fidrmuc, Goergen, and Renneboog 2007; Ke and Petroni 2004; Jiang 2010).

⁴ To examine the influence of market uncertainty on lending relationships, we follow the study of Bliss, Clark, and DeLisle (2018) to consider the VIX measure. Our empirical results show that the relationship between high VIX and cumulative abnormal returns is significant and positive, i.e. high VIX which denote the firms during high uncertainty period can earn high CARs around bank loan announcement dates (Barth et al. 2017; Ross 2010). The positive excess returns associated with bank loan announcements reflect the optimistic view of investors, and we examine the different average days of returns on a tradable volatility-based asset, the futures contract.

⁵ Also, bank loans are an essential source of external financing for corporations. The determinants of firm characteristics on bank loan contracts are the popular topics for research in recent years (Graham, Li, and Qiu 2008; Bharath, Sunder, and Sunder 2008; Hasan et al. 2014; Bui et al. 2018). Different from prior studies, we propose a different perspective for observed the impacts of sentiments on firm performance in bank loan announcement events.

Additional information

Funding

Yin-Siang Huang appreciates financial support from by Social Science Fund of Fujian Province, China (Project number: FWKQJ201901). Any remaining errors are ours;Social Science Fund of Fujian Province, China [FWKQJ201901].