Does a Bank’s Loan Screening and Monitoring Matter?

We investigate the relationship between the borrower’s abnormal loan announcement return and the bank’s loan screening and monitoring using a new ex-ante proxy for loan screening and monitoring. While recent studies have suggested that bank loan relationships and related loan screening and 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 statistically significant positive relationship between the proxy and the borrower’s standardized CAR. While consistent with a bank’s loan screening and monitoring adding value to the borrower, the economic effect is relatively small.