Affiliates’ Bank Debt Policy: Does Parent Firm Nationality Matter?

Abstract

This paper examines whether and how bank debt is affected by foreign group affiliation. Ceteris paribus, affiliates of foreign business groups only use about half as much bank debt compared to affiliates of domestic groups. Further, the results indicate that geographical and cultural distance between parent and affiliate countries raise barriers when accessing bank financing. The bank debt usage decreases even further if affiliates and parent firms depend on different legal systems or the degree of legal enforcement in the parent firm's country is low.

Management earnings forecasts and bank loan contracting

“…Prior literature suggests that management forecast issuance varies with firm performance (Kim, ; Lang & Lundholm, ). Firm performance also influences a firm's decision to use bank debt (Badoer & James, ; Locorotondo, Dewaelheyns, & Hulle, ). Since management earnings forecasts are endogenously determined, one natural concern about the endogeneity issue is that the association between the issuance of management forecasts and a borrowing firm's entrance into a bank loan could be driven by the firm's underlying performance.…”

“…To alleviate this concern, we adopt a PSM procedure to match loan activation firm‐quarters with non‐loan activation firm‐quarters when testing H1a . We predict firms’ loan borrowing decisions ( BORROW ) based on a set of firm characteristics ( Assets , Tangibles , Profitability , Growth , Cash Holding , Leverage ; see Table for the variable definitions) and industry and year fixed effects (Badoer & James, ; Locorotondo et al., ). For the non‐loan activation firm‐quarters in the control group, we require that no bank loan was activated three years before or after the matched non‐loan activation quarter…”

“…Tucker () argues that, in non‐experimental study designs, PSM can be used to mitigate selection bias due to observable firm characteristics that are not controlled for. Prior literature (Badoer & James, ; Locorotondo, Dewaelheyns, & Hulle, ) documents well that a firm's financial performance, such as its size, tangible assets, profitability, growth, cash holdings and leverage, influence its decisions to borrow from banks. Therefore, we employ such characteristics to carefully match firms that enter into bank loans with those that do not, to make sure that our treatment and control groups are not significantly different in terms of firm fundamentals.…”