We investigate the relationship between the borrowing firm?s abnormal loan announcement return and the lending bank?s monitoring ability using a new, well-specified, ex-ante proxy for the bank?s monitoring ability. While recent studies have suggested that bank loan relationships and the related monitoring services may no longer matter, we find significant loan announcement returns over the 1995-1999 period and, controlling for borrower and loan characteristics, a strong positive relationship between a labour input based proxy for monitoring ability and the borrowing firm?s abnormal return. Our results are consistent with banks with superior monitoring ability adding more value to the borrower than less capable banks.
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