<b>The Effect of Bank Reputation on the Value of Bank Loan Agreements</b>

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.

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