Cost Of Bank Loans Research Articles

LIBOR Discontinuation and the Cost of Bank Loans

LIBOR Discontinuation and the Cost of Bank Loans

Credit risk correlation and the cost of bank loans

Credit risk correlation and the cost of bank loans

Common institutional ownership and the cost of debt in Taiwan

We examine the impact of common institutional ownership (CIO) of firms in the same industry on their cost of bank loans using data on Taiwan-listed firms from 1996 to 2021. The evidence shows that CIO is negatively related to loan spreads. When decomposing our sample according to a firm's life cycle and family ownership, the negative relation is significant only in the mature stage of a firm's life cycle and for family-owned firms. The subsample evidence suggests that CIO enhances effective monitoring to increase firm value, lowering loan spreads. We also find that the negative relation becomes statistically insignificant during the financial crisis period because that CIO tends to reduce investments in the same industry, thus weakening its effect during the global financial crisis.

Family succession and cost of bank loans: Evidence from China

This study examines the effect of family succession on the cost of bank loans and non-price contractual terms. We use a unique dataset from China and find that lending banks are likely to charge higher interest rates and offer tighter contractual terms, such as loan maturity and collateral requirements, for family succession firms. These findings indicate that information asymmetry and default risks may arise after subsequent family successions. We also find that family succession firms can lower the cost of bank loans by hiring top-tier auditors, who can enhance financial reporting credibility. This finding suggests that professional, high-quality auditors can provide extremely valuable services to family succession firms.

ФІНАНСОВА БЕЗПЕКА КРАЇНИ В УМОВАХ ЦИФРОВІЗАЦІЇ СОЦІАЛЬНО-ЕКОНОМІЧНИХ ПРОЦЕСІВ

The issues of the study concern the high level of inflation, low growth rates, high internal and external debt, which reduce the incentives for investment necessary to restore growth and improve the standard of living and increase the degree of financial fragmentation. It is noted that today's weak demand and the high cost of bank loans will put pressure on global financial markets, which will force multinational companies to cut costs: from cutting operating costs to laying off workers. The interdependence of disruptions in the supply chain and the level of business activity of aerospace enterprises is substantiated. The purpose of the study is to analyze the trends and risks of existing concepts of guaranteeing the financial security of the country in the context of systematization of modern provisions and concerns of leading financiers regarding the probability of a global financial recession in the conditions of digitalization of socio-economic processes. Scientific publications and monographic editions, magazine articles and materials of scientific and practical conferences became the methodological basis of the research. Content analysis of scientific periodicals was used during the research; comparative critical analysis of existing approaches and methods of analysis of financial stability and tax burden; analysis of economic activity of enterprises in the aerospace industry; statistical methods of analysis. The main hypothesis of the study was the assumption of the possibility of restoring the production potential of aerospace enterprises due to the introduction of the latest financial and economic technologies of digital transformation of Ukraine, national projects for the development of entrepreneurship, digital interaction platforms. Presenting main material. The list of necessary skills of employees to meet the modern needs of society at the current stage of financial and economic development is analyzed. The classification of the necessary retraining of employees until 2025 due to the growth of the introduction of technologies and the level of their mastery is presented. It is proposed to carry out an effective policy in the field of providing the financial market with banking regulation instruments and attracting new investment resources with a guarantee for investors to return their own funds. The originality and practical significance are defined in the development of a methodical approach to determining indicators of the country's financial security under the conditions of digitization of socio-economic processes. Conclusions and prospects for further research. The article can contribute to the development of new financial instruments and technologies that take into account digital trends. The possibilities of using blockchain technologies, artificial intelligence and automated systems to ensure the financial security of the country are highlighted. The methods of assessing potential threats, the effectiveness of security measures and determining priorities in investing in digital security are characterized

Business groups and the impact of industry relatedness on firms' borrowing costs

PurposeThis study analyzes whether industry relatedness between a corporate borrower and its group peers significantly affects that firm's borrowing cost.Design/methodology/approachA regression analysis is run on bank-loan data of a sample of Indonesian companies for 2010–2020. The main variables of interest are the natural logarithms of the borrowing firm's number of affiliates classified within either similar 2- or 4-digit GICS industries, and the Caves weighted index of these firms' related diversification. This index measures how firms in a group are diversified in relation to the borrower. The dependent variable is the all-in credit spread, stated in basis points, over the LIBOR or similar benchmark, as of the loan issuance date.FindingsFindings support the industry-relatedness hypothesis and contradict the risk-reduction hypothesis and show that banks charge lower loan spreads on a borrowing firm that either operates within a similar industry as its affiliate or diversifies into related sectors or industries. Consistent with the co-insurance-effect hypothesis, the results also underline the importance of the parent and first-layer firms as supporting instead of the tunneling vehicles within business groups. These conclusions hold even after segregating the sample and using the loan maturity as the dependent variable.Originality/valueThis study uses a unique diversification measurement based on the borrowing firm's sector or industry, relative to other group members, and offers new insights on business group diversification and bank loan costs.

Are environmental lawsuits related to the cost of bank loans?

PurposeConsidering the importance of environmental lawsuits in the capital market specifically and society more generally, the authors examine whether environmental lawsuits are related to the cost of bank loans for the first time.Design/methodology/approachThis study uses a US sample of 7,684 loans from 1,409 individual borrowing firms over the 1995–2015 period. The hypothesis is tested using lagged data from the year before the start of a bank loan, and firm fixed effects panel regression analysis is applied to control for correlated omitted variable bias. To further address endogeneity concerns, the authors use a difference in differences analysis that exploits the Deepwater Horizon oil spill on April 20, 2010, to establish causality. Finally, the authors use the entropy balancing method as an additional endogeneity check.FindingsThe authors find a positive relationship between environmental lawsuits and firms' bank loan costs. The results are economically significant. In particular, a one standard deviation increase in environmental lawsuits is related to a 2.07 basis point increase in bank loan costs. The results are robust to various endogeneity checks. Cross-sectional analyses indicate that a poor information environment, weak corporate governance, and low corporate social responsibility (CSR) levels strengthen the positive relationship between environmental lawsuits and bank loan costs. Finally, additional analyses show that environmental lawsuits are significantly negatively related to the loan amount and maturity contract provisions.Originality/valueThe authors provide new empirical evidence that increasing understanding of the economic consequences of environmental lawsuits on bank loan costs.

Geopolitical risk and the cost of bank loans

We examine the relation between geopolitical risk and the cost of bank loans using a sample of 31,004 loan facilities in the US over the period 1991–2019. We show that geopolitical risk is associated with higher loan prices and more stringent nonprice loan terms. With one standard deviation increase in the geopolitical risk index, the average cost of bank loans increases by 7.253 basis points. Delving into the components of geopolitical risk, we find that the effects of geopolitical acts on the cost of bank loans and nonprice loan terms are more pronounced than those of geopolitical threats.

Private placements of equity and accessibility of bank loans.

This study investigates the changes in quantity and cost of bank loans after a private placement of common stocks by A-share listed companies in China from 2011 to 2021. This research is derived from the signaling theory and is based on a difference-in-difference design. Through propensity score matching, the sample comprises companies that placed equity privately in the experiment group and companies that did not place equity privately in the control group. We find evidence that the increase in bank loans slowed down, and the cost of bank loans increased after the private placement. The signaling effect of private placements is robust to various additional tests. Further analysis indicates that when state-owned enterprises place equity privately, their access to bank loans is not affected. When institutional investors participate in the private placement, the company's access to bank credit does not go through significant changes. In addition, private placements by companies located in regions with higher levels of marketization of the financial market do not reduce the cost of bank loans.

Does IRS Monitoring Matter for the Cost of Bank Loans?

We show that IRS monitoring exerts a significantly negative effect on the cost of syndicated loans. A one standard deviation increase in the probability of an IRS audit decreases loan spreads by around nine basis points. We also find that this effect is stronger for borrowers with better lending relationships and credible access to public markets. These results indicate that IRS monitoring could increase the bargaining power of borrowers and restrain banks from extracting informational rents from their lending relationships. Thus, they provide a novel insight into how IRS monitoring could lower the cost of financing from the banking system.

Do Lenders Value a Corporate Sustainability Structure?—Evidence from the Cost of Bank Loans

In response to pressures placed on a firm by its stakeholders, managers may initiate various corporate sustainability activities. In such cases, they need to make decisions not only about the level of sustainability commitment, but also about the way to structure it. There are numerous ways to structure corporate sustainability activities with different financial consequences. In this paper, we investigate the separate and joint effects of the corporate sustainability level and the corporate sustainability structure on a firm’s bank borrowing cost. We test our predictions by conducting multivariate regression analysis on a sample of 1417 US bank loan facilities over the period 2006–2011. We find evidence that high-quality borrowers with a high level or diversified structure of sustainability activities benefit from lower loan interest rates. Also, our analysis of the joint effects shows that only high-quality borrowers with a high level and diversified sustainability activities enjoy lower bank loan costs. Overall, these results reveal that lenders value how firms structure their sustainability activities. Therefore, they have important implications for managers and bankers.

Did quantitative easing reduce the borrowing costs of firms? The risk‐taking channel

AbstractThis paper examines the effect of the Federal Reserve's quantitative easing (QE) on the cost of bank loans and documents large heterogeneous effects across different firms. In QE1, the average loan spread is 22.7 percent lower compared to the non‐QE period. This effect falls in QE2 and OT and then rises in QE3 and the tapering period. The rates of riskier loans are restrained more than less risky loans during QEs as banks take more risks by offering lower rates to attract risky borrowers. The Fed mortgage‐backed securities purchases have a larger impact in narrowing the borrowing cost difference between riskier and safer loans than the Fed Treasury purchases. Our results are robust to borrower, year‐quarter and bank fixed effects. Overall, our findings support that the risk‐taking channel of QE plays a significant role in the corporate bank loan market.

Does commodity price uncertainty matter for the cost of credit? Evidence from developing and advanced economies

In this study, we focus on the effect of commodity price uncertainty on the cost of bank credit for a broad sample of loans traced to firms operating in developing and advanced economies. Using loan-level data for the 1990–2019 period, we find novel evidence that commodity price uncertainty, as estimated by a Bayesian Dynamic Factor Model, increases the cost of bank loans particularly for commodity dependent firms operating in developing countries vis-à-vis commodity dependent firms operating in advanced economies. In a further analysis, when examining the effect of group specific commodity price uncertainty on cost of borrowing, we find that agricultural price uncertainty significantly increases the cost of credit of commodity dependent firms operating in developing economies. We also find that commodity price uncertainty rises the cost of bank credit more for loans traced to firms locating in bank-based countries as compared to loans granted to firms operating in market-based economies, suggesting that the financial structure of a country could play an important role in passing through the borrowing costs to firms. Lastly, we also find that the effect of commodity price uncertainty is more pronounced for smaller firms operating in developing countries as opposed to smaller firms operating in developed countries. All in all, the above evidence provides useful policy implications, particularly, for the longevity of corporate sector operating in developing countries whereby the local financial structure poses serious threats to firms’ future earnings.

CFOs’ facial trustworthiness and bank loan contracts

Using a well-developed machine learning-based image processing algorithm, we investigate whether a bank considers the facial trustworthiness of the chief financial officer (CFO) of a borrower firm for loan contracts. Based on a large sample of public firms in the United States, our results show that banks tend to offer lower loan spreads and are less likely to use collateral for firms with more facially trustworthy CFOs. Further, the results hold when we control the chief executive officers' (CEOs') facial trustworthiness, implying that it is the CFOs who negotiate with the banks about loan contracts. The effect of CFOs' facial trustworthiness on bank loan contracts is more pronounced in small or young firms, and less pronounced for firms in financial distress. Our study adds to the literature on the determinants of bank loan costs and the influence of managers’ facial features on corporate finance and corporate governance.

The Effect of Organization Capital on the Cost of Bank Loans

AbstractWe find that organization capital is negatively related to the cost of bank loans. This finding is robust to additional analyses including those that address omitted variable bias and reverse causality. In addition, we find that organization capital reduces all-in-spread-undrawn. When we decompose the bank loan cost, we find that organization capital increases facility fees due to its risk-engendering characteristics. Finally, we find that organization capital is positively associated with a high likelihood of the presence of inventors and innovation output, consistent with the argument that organization capital is embedded in the key talent within a firm.

Trust and contracting with foreign banks: Evidence from China

We empirically investigate whether firms doing business in regions characterized as having high social trust receive preferential treatment on loan contractual terms by foreign banks. Tracing cross-border syndicated lending activities in China, we document that firms located in provinces with higher social trust scores obtain significantly low costs of bank loans and experience less stringent collateral requirement. To address the potential endogeneity issues, we adopt an instrumental variable approach and a two-sided matching model, and report consistent results. We also estimate a system of three equations through three-stage-least square estimator to accommodate the joint determination of price and non-price terms in loan contracts. In addition, we find that the effect of social trust on cost of bank loans is more prominent for firms located in provinces with relatively less developed formal institutions.

What firm risk factors drive bank loan pricing and other terms? Evidence from China

AbstractThis study investigates how firm risk factors affect bank loan pricing. Although firm‐specific stock price crash risk affects bank loan costs directly, it also prompts other risks, including financial restatement and litigation, which in turn trigger higher bank loan costs. Strong internal and external governance mechanisms help reduce agency problems and improve information transparency, alleviating the adverse effect of stock price crash risk on loan costs. Our results confirm that bankers take good corporate governance into account in their bank loan decisions. We also show that bond investors price the adverse effect of stock price crash risk, prompting higher corporate bond costs. Futher evidence suggests that banks impose stricter non‐price terms, such as smaller loan size, shorter loan maturity, and a higher likelihood of collateral requirement, on firms with higher crash risk.

Do credit market accessibility and legal protection shape corporate innovation?

AbstractWe examine the effects of credit market accessibility and legal protection on corporate innovation in a pseudo‐multinational setting at the firm level, emphasizing the channels through which corporate innovation is affected. A horse race suggests that credit market accessibility facilitates innovation more than legal protection does. Credit market accessibility promotes innovation by alleviating financial constraints through reduced bank loan costs, larger bank loans, and more long‐term loans. Consistent with our reasoning, the effects are greater for private enterprises than for state‐owned firms.

Labor unemployment insurance and bank loans

I investigate the influence of unemployment insurance (UI) benefits on the cost of bank loans by exploiting changes in state unemployment insurance laws as a source of variation in labor unemployment costs. The evidence shows that the cost of bank loans is significantly lower for firms headquartered in states with more generous UI programs. The relation between UI benefits and the cost of bank loans is more pronounced for firms that face higher unionization rates, are more labor intensive, or have a higher layoff propensity. These results are robust to controlling for loan characteristics, macroeconomic conditions, and borrower characteristics and using fixed effect regressions. I also find further evidence of a causal relation between UI benefits and the cost of bank loans through a difference-in-differences (DID) approach. Overall, the results suggest that the credit market evaluates workers' unemployment costs while approving and pricing loan contracts.

Don't interfere with my rights! Employee rights violation and the cost of bank loans

AbstractWe study the relationship between the cost of bank loans and the charges filed to the National Labor Relations Board (NLRB) due to managerial interference in employee rights. Loans issued after the filing of the allegations are associated with significantly higher loan spreads than loans initiated before the filing of allegations. Strong allegations that result in withdrawal with adjustments or compliance tend to positively affect the loan pricing. Further, interfering firms tend to experience higher default risks in the years following the filing of charges. Our paper is the first in the literature to show the impact of violation of employee rights on the cost of bank loans, which has an implication for environmental, social, and governance (ESG) lending where loan contract terms are contingent on borrower ESG performance.