Do Cultural Differences Between Contracting Parties Matter? Evidence from Syndicated Bank Loans

Abstract

W e investigate whether cultural differences between professional decision makers affect financial contracts in a large data set of international syndicated bank loans. We find that more culturally distant lead banks offer borrowers smaller loans at a higher interest rate and are more likely to require third-party guarantees. These effects do not disappear following repeated interaction between borrower and lender and are economically sizable: A one-standard-deviation increase in cultural distance, approximately the distance between Canada and the United States or between Japan and South Korea, is associated with a 6.5 basis point higher loan spread; the loan spread increases by about 23 basis points if the bank-firm match involves culturally more distant parties, for example, from Japan and the United States. We also find that cultural differences not only affect the relation between borrower and lender, but also hamper risk sharing between participant banks and culturally distant lead banks.

Mind the Gap: The Difference between U.S. And European Loan Rates

“…8 See for instance, Giannetti and Laeven (2012), Giannetti and Yafeh (2012). Saunders and Steffen (2011) use Dealscan data to investigate loan spread differences between public and private firms in the UK.…”

“…syndicated loan market structure (Esty and Megginson (2004); Giannetti and Laeven (2012); Giannetti and Yafeh (2012)). …”

Foreigners vs. Natives: Bank Lending Technologies and Loan Pricing

“…Results in Panel C indicated that failing to account for time since entry or since becoming foreign owned, may confound comparisons between branches and subsidiaries. In Panel C we 44 See, among others, Bruno and Hauswald (2014), Claessens and van Horen (2014), Giannetti and Yafeh (2012), Gormley (2014), andMian (2006). 45 The literature also suggests that branches and subsidiaries follow different business models.…”

The interplay of cultural intolerance and action-assortativity for the emergence of cooperation and homophily

“…Such a cost can also be psychological. Starting with the seminal work of Becker (1957) on taste-based discrimination, numerous researches have found that mistrust, animosity and negative attitude across cultural groups have significant impact on trade and investment (Guiso et al, 2009, Michaels and Zhi, 2010, Fisman et al, 2014; on labor market outcomes (Becker, 1993, Bertrand and Mullainathan, 2004, Bandiera et al, 2009); on financial activities such as mergers and bank loans (Giannetti andYafeh, 2012, Ahern et al, 2012). We call the cost/disutility of cross-cultural interaction cultural aversion in the rest of the paper.…”