Initial bank loans, zero-leverage firms and stock market liquidity: New empirical evidence from the UK

Abstract

Purpose

The purpose of this paper is to examine stock market reactions and liquidity effects following the first bank loan announcement of zero-leverage firms.

Design/methodology/approach

The authors use an event studies methodology in both a univariate and multivariate framework. The authors also use regression analysis.

Findings

Using a sample of 96 zero-leverage firms listed on the FTSE 350 index over the time period of 2000–2015, the authors find evidence of a significant and permanent stock price increase as a result of the initial debt announcement. The loan announcement results in a sustained increase in trading volume and liquidity. This improvement continues to persist once the authors control for stock price and trading volume effects in both the short and long run. Furthermore, the authors examine the spread decomposition around the same period, and discover the adverse selection of the bid–ask spread is significantly related to the initial bank loan announcement.

Research limitations/implications

The results can be attributed to the information cost/liquidity hypothesis, suggesting that investors demand a lower premium for trading stocks with more available information.

Originality/value

This is the first paper to look at multiple industries, more than one loan and information asymmetry effects.

Citation

Zhang, S. and Gregoriou, A. (2019), "Initial bank loans, zero-leverage firms and stock market liquidity: New empirical evidence from the UK", Journal of Economic Studies, Vol. 46 No. 5, pp. 1028-1051. https://doi.org/10.1108/JES-05-2018-0190