The effect of borrower country financial system and corporate governance system types on the spread of syndicated loans

Abstract

Purpose This study aims to analyse the effect of borrower’s countries on syndicated loan spreads, featuring countries according to institutional factors, namely, financial systems and corporate governance systems. Design/methodology/approach This study is an empirical investigation based on a unique sample of more than 85,000 syndicated loans from 122 countries. The paper uses standard and two-stage least squares regression analysis to test whether the types of financial and corporate governance systems affect loan spreads. Findings The paper finds that borrowers from countries with financial systems oriented towards the banking-based paradigm pay lower interest rate spreads than those from countries with financial systems oriented towards the market-based paradigm. In addition, there is evidence that borrowers from countries with more developed financial systems pay lower spreads. The results also show that borrowers from countries with an Anglo-Saxon governance system pay higher spreads than borrowers from countries with a Continental governance system. Research limitations/implications This study does not consider potential promiscuous relationships that can arise at the ownership structure and governance level between banks and borrowers and may affect loan spreads. Practical implications This study suggests that financial and corporate governance systems are essential factors in the financial intermediation process. Furthermore, the evidence indicates that corporates with higher potential agency costs and higher potential information asymmetry are requested to pay higher spreads. Therefore, the opportunities to such corporates invest optimally tend to be scarcer. Originality/value The paper highlights the impact of institutional factors on the cost of financing, characterising the countries according to the type of financial system and the type of corporate governance system. The study finds that borrowers from countries with bank-based financial systems pay lower interest rate spreads than those from countries with market-based financial systems. The paper also highlights how the level of financial development affects the cost of financing. The paper focusses on non-financial firms, unlike financial firms, which have been the focus of several empirical studies on topics relating to the cost of funding and corporate governance.

Factors Influencing Syndicated Loan Spreads: A Review of Literature

“…Battacharya and Daouk ( 2005) state that it is the enforcement, not the existence of laws that affects the loan contracting process. Moutinho et al (2022) find that borrowers from countries with a Continental governance system pay lower syndicated loan spreads compared to borrowers from countries with an Anglo-Saxon governance system. Qian and Strahan (2007) focus on creditor rights and find that strongr legal rights result in loans with longer maturities and lower spreads.…”

Enforcement, corporate governance, and financial decisions

“…While the focus is on equity financing, it is conceivable that other social conditions, such as religion (critical in Islamic countries), may make debt financing a means of transmitting investors’ ethical preferences to firms’ financing decisions. Studies on social capital show that financial intermediation is associated with varying degrees of opacity concerning borrower identity, social commitment and bankruptcy costs, thereby indirectly influencing financing decisions (Moutinho et al , 2022; Oyotode and Ali Raja, 2015). Thus, social conditions affect the relative attractiveness of firms’ debt versus equity financing decisions through several channels.…”

Determinants of Syndicated Loan Spreads in Central, Eastern and South-Eastern European Countries

“…Another stream of research studies the effect of information asymmetries on the structure of loan syndicates (Aldasaro et al, 2022;Arscott and Nini, 2022). A less abundant stream of literature focuses on syndicated loan pricing (Lambertini and Mukherjee, 2022;Mi and Han, 2020;Moutinho et al, 2022). This study contributes to the syndicated loan pricing research stream and is most closely related to Altunbas and Gadanecz (2004), Focarelli et al (2008) and Haselmann and Wachtel (2011).…”