Debt maturity dispersion and the cost of bank loans

This paper examines the relation between corporate debt maturity dispersion and the pricing and terms of bank loans. Analyzing a sample of U.S. bank loans from 2002 to 2016, we find that firms with a dispersed debt maturity structure pay a lower interest rate. The rate-reduction effect is significant only for firms without a credit rating. For these firms, spreading debt maturity dates also results in lower commitment fees, fewer covenant restrictions, and less collateral in their loan contracts. The impact of debt maturity dispersion on the pricing and structure of bank loans is stronger when borrowers have higher rollover risk or when the need for monitoring is greater. Our results suggest that dispersion in debt maturity structure mitigates the agency problem associated with shareholder–creditor conflicts by reducing rollover risk and alleviating the need for monitoring, which results in borrowers receiving more favorable terms in loan contracts.     

Loan pricing under Basel capital requirements

We analyze the loan pricing implications of the reform of bank capital regulation known as Basel II. We consider a perfectly competitive market for business loans where, as in the model underlying the internal ratings based (IRB) approach of Basel II, a single risk factor explains the correlation in defaults across firms. Our loan pricing equation implies that low risk firms will achieve reductions in their loan rates by borrowing from banks adopting the IRB approach, while high risk firms will avoid increases in their loan rates by borrowing from banks that adopt the less risk-sensitive standardized approach of Basel II. We also show that only a very high social cost of bank failure might justify the proposed IRB capital charges, partly because the net interest income from performing loans is not counted as a buffer against credit losses. A net interest income correction for IRB capital requirements is proposed.     

Bank Mergers,REIT Loan Pricing and Takeover Likelihood

The impact of bank mergers on Real Estate Investment Trust (REIT) loan pricing and takeover likelihood is assessed. REITs that lose their primary banking relationship due to bank mergers pay higher interest rates on future borrowings. Bank consolidation reduces bank competition for REIT loans which affects loan pricing. Moreover, based on randomly matched samples of REITs, the results imply that firms losing their agent banks due to bank mergers and those with limited access to bank debt are more likely to be acquired while REITs associated with acquiring banks are more likely to acquire other firms. Additional analysis of the 92 merged REITs reveals that 33% of the target REITs’ banks are merged with their REIT acquirers’ banks prior to the REIT mergers while 67% of the target REITs share at least one major bank with their acquirer.     

Product market relationships and cost of bank loans: Evidence from strategic alliances

This paper examines the relation between strategic alliances and non-financial firms’ bank loan financing. We construct several measures to capture firms’ alliance activities. The key finding is that borrowing firms with active alliance involvement experience lower cost of bank loans. The reduction of borrowing cost is strongest for financially unconstrained firms and firms with high G-index and intensive monitoring from institutional investors. We also relate various characteristics of alliance agreements to the cost of bank borrowing, and find evidence supporting market power hypothesis and organizational flexibility hypothesis. We further report that allying with a prestigious partner (i.e., S&P 1500 firms) provides certification effect that lowers bank loan cost. In addition, firms positioned in the center of the alliance network enjoy lower cost of bank loans. Lastly, we document that firms engaging in alliance activities expand their debt capacity and are less likely to use collaterals and covenants in their bank loan contracts.     

Accounting quality,bank monitoring,and performance pricing loans

We provide new evidence on the determinants of performance pricing provisions in bank loan contracts. We find that firms that are easier to monitor, such as those with better accounting quality, lower information opacity, or a stronger relationship with the lender are more likely to have performance pricing loans. The use of performance pricing is less likely after financial restatement events. Furthermore, we find that the likelihood of using accounting-based (as opposed to credit-rating-based) pricing provisions increases as the firm’s accounting quality increases, and as the strength of the prior lending relation increases. Our results are robust to alternative measures of accounting quality, information opacity, and bank monitoring, and suggest that monitoring costs have a significant impact on the design of debt contracts.     

Shibor对我国银行主要金融产品定价的基准性分析

构建和培育市场基准利率是完善市场化利率体系的重要基础条件。自2007年人民银行构建和培育市场基准利率Shibor（上海银行间同业拆放利率）以来,Shibor的基准地位不断提高。加强对Shibor的基准性研究,分析判断Shibor在银行主要金融产品定价中的基准地位,成为当前我国利率市场化改革的重点课题。本文运用协整检验考察了Shibor对同业存款利率、贴现利率和贷款利率定价的基准性,通过误差修正模型（ECM）描述了各主要金融产品利率同Shibor走势的长期均衡关系和短期动态调整过程,分析了各主要利率的形成机制,并针对实证结果,结合目前的商业银行利率定价机制,提出了相关建议。     

CORPORATE BOARDS AND BANK LOAN CONTRACTING

We investigate the role of corporate boards in bank loan contracting. We find that when corporate boards are more independent, both price and nonprice loan terms (e.g., interest rates, collateral, covenants, and performance‐pricing provisions) are more favorable, and syndicated loans comprise more lenders. In addition, board size, audit committee structure, and other board characteristics influence bank loan prices. However, they do not consistently affect all nonprice loan terms except for audit committee independence. Our study provides strong evidence that banks recognize the benefits of board monitoring in mitigating information risk ex ante and controlling agency risk ex post, and they reward higher quality boards with more favorable loan contract terms.     

Board quality and the cost of debt capital: The case of bank loans

We analyze the relation between comprehensive measures of board quality and the cost as well as the non-price terms of bank loans. We show that firms that have higher quality boards with a greater advisory presence borrow at lower interest rates. This relation exists even after controlling for ownership structure, CEO compensation policy, and shareholder protection, as well as the size and financial characteristics of the borrower and of the loan. We also show evidence that board quality and other governance characteristics influence the likelihood that loans have covenant requirements, but the relations differ by covenant type. When we combine the direct and indirect costs of bank loans we find that firms with large, independent, experienced, and diverse boards and lower institutional ownership borrow more cheaply. Overall, the evidence indicates that board quality impacts the cost of bank debt.     

Aligning debt and equity claimant interests: Evidence from dual claim investors

This study investigates how investors that own both equity and debt in the same firm affect other shareholders in the firm. It documents that dual claim investors are quite prevalent among the industrial firms listed in the Russell 3000, with over 20% of them having a bank holding company that owns both debt and equity in the firm. The results imply that shareholders are substantially impacted by the presence of dual claim investors in firms, suggesting that relatively small ownership stakes by dual claim banks are associated with greater conflicts of interest among shareholders and debt holders; while relatively large bank equity stakes may benefit outside shareholders when aligned with loan by dual claim banks because they improve bank monitoring incentives and reduce the agency cost of debt.     

Managing the risk of loan prepayments and the optimal structure of short term lending rates

Loan pricing is an extremely important aspect of bank operations because loans are typically over two-thirds of bank assets. Many researchers have analyzed the theoretical and empirical impact of how different factors should and do affect fixed rate loan rates and loan prepayments. However, a theoretical decision making model for maximizing expected profit in a declining rate environment has not been developed. After describing the conditions for the optimal loan rate, we develop numerical solutions for it under varying conditions. The varying conditions include the trend in interest rates, volatility of interest rates, and loan maturity. We thank Yen Low and Hamed Bagherpour for their assistance.     

我国商业银行贷款定价方法探讨

随着利率市场化进程的加快，我国商业银行的贷款定价体系面临着越来越严峻的考验。为了适应利率市场化的需要，应该改进国内现有的贷款定价方法，建立一个“以贷款平均收益率为基准利率，兼顾贷款风险溢价以及银行与客户整体关系”的贷款定价模型。     

Management quality and the cost of debt: Does management matter to lenders?

This paper investigates the effect of organizational capital, typified by various management practices within a firm, on the cost of external debt financing. Using a sample of medium-sized manufacturing firms in the US, we find that better management practices enhance a firm’s external financing capacity by lowering the firm’s cost of bank loans. We do not find any evidence that the lower loan cost of a high-quality-management firm is associated with more restrictive non-price contract terms such as greater collateral requirements and stricter covenants. These results suggest that banks explicitly take into account the risk arising from poor management practices when pricing and designing debt contracts.     

Hedge commitments and agency costs of debt: evidence from interest rate protection covenants and accounting conservatism

We provide large sample evidence that credible hedge commitments reduce the agency costs of debt and that accounting conservatism enhances hedge commitments. We examine 2,338 bank loans entered into by 263 mandatory derivative users that are contractually obligated by interest rate protection covenants, 709 voluntary derivative users, and 1,366 non-users. We show that loan contracts are more likely to include interest rate protection covenants when borrowers are less likely to maintain the hedge position once the financing is completed. We find that borrowers who credibly commit to hedge using these covenants significantly reduce their interest rates. While we do not find an average interest savings for voluntary derivative users, we do find a reduction in their loan rates when they practice conservative financial reporting. Our results suggest that accounting conservatism helps borrowers resolve shareholder-creditor conflicts by committing to maintain their hedge positions after completing debt financing.     

LPR改革对居民消费信贷的影响分析

作为利率市场化的关键一步,贷款市场报价利率(LPR)形成机制的改革有助于提高利率传导效率,并以市场化手段推动降低实体经济融资成本。这同样会对居民部门消费需求产生影响。特别是在居民杠杆率增长快、资产流动性不足、信贷渠道发挥的作用相对有限的背景下,以LPR为基础的贷款定价方式改革不仅有助于优化跨期消费决策,缓解偿债压力,强化直接利率效应,还可以通过提升企业经营效率以及居民收入,加强间接收入效应。     

Does the use of tax haven subsidiaries by U.S. multinational corporations affect the cost of bank loans?

This study examines whether the use of tax haven subsidiaries by U.S. multinational corporations (MNCs) is associated with the cost of bank loans. We find that more intensive tax haven subsidiary use by MNCs is positively associated with the cost of bank loans. In cross-sectional analyses, we identify channels through which the positive association between tax haven intensity and bank loan costs is more pronounced, such as a weak information environment, poor corporate governance, high CEO pay-for-performance and corporation-related wealth, and low managerial ability. We also find that intensive tax haven use is positively (negatively) associated with non-price loan contract terms, such as collateralization and financial covenants (loan maturity and general covenants). Our main result holds when public bonds are substituted for bank loans. Finally, additional analysis shows that MNCs with high levels of tax haven intensity are more likely to rely on bank loan financing than on raising debt from the bond market. Overall, this study adds to an emerging body of literature on corporate taxation and debt policy.     

Debt covenants in Japanese loan markets: in comparison with the traditional relationship banking

This study investigates determinants of debt covenants in Japanese loan markets. We focus on a unique monitoring mechanism by Japanese banks and hypothesise that debt covenants substitute for the traditional main bank governance. Consistently, we find that debt covenants are less likely to be used for firms with stronger ties with their main banks. We also document that such use of debt covenants results in borrower’s upward earnings management. Overall, our evidence suggests that, in the Japanese context, debt covenants are used as a substitute for the main bank system yet they alone are an incomplete monitoring mechanism.     

The Pricing of Sequential Bank Loans

The theory of financial intermediation assigns banks a unique role in the resolution of information asymmetry. Banks, in general, obtain private information about the borrower and the project during the screening of loan applicants and during the monitoring of loan recipients. Incumbent banks, in particular, utilize information obtained while monitoring previous loan extensions to resolve information asymmetry when granting subsequent loans. We examine the rate on a sequence of loans to a borrower and find that the incumbent bank information advantage has finite magnitude and is quickly reflected in the pricing of the second loan. We also find that the lending relationship does not deteriorate to the detriment of the borrower. This study also provides further evidence supporting the hypothesis that an incumbent bank resolves information asymmetry during the monitoring of loan extensions.     

Simple Banking: Profitability and the Yield Curve

How does bank profitability vary with interest rates? We present a model of a monopolistically competitive bank subject to repricing frictions and test the model's predictions using a unique panel data set on UK banks. We find evidence that large banks retain a residual exposure to interest rates, even after accounting for hedging activity operating through the trading book. In the long run, both level and slope of the yield curve contribute positively to profitability. In the short run, however, increases in market rates compress interest margins, consistent with the presence of nonnegligible loan pricing frictions.     

Intellectual property rights reform and the cost of corporate debt

This paper investigates the role of intellectual property rights (IPR) protection on the cost of bank loans for firms in 48 countries. Using substantial reforms of patent rights as a source of identifying variation, the paper provides strong evidence that borrowers from countries that underwent IPR reform experience significant reductions in the cost of bank debt. Importantly, the effects of IPR reform on loan rates are significantly larger in industries that are more IP-intensive. Additional analysis shows that in the wake of reforms borrowers obtain larger size loans, which indicates that improvements in IPR are associated with greater credit availability. IPR reform also increases foreign lenders participation in loan syndicates. Overall, these findings suggest that legal protection afforded to intellectual property has a significant impact on the cost of corporate borrowing and the ability of innovative firms to raise debt capital.     

The impact of loan prepayment risk and deposit withdrawal risk on the optimal intermediation margin

Numerous studies have analyzed how a bank's intermediation margin varies with respect to such factors as credit quality, funding risk, bank capital, deposit insurance and other factors. However, these studies ignore the potential that loans tend to prepay if interest rates decline and deposits tend to be withdrawn if interest rates rise. Taking this very fundamental fact into account, we derive optimal loan rates and deposit rates when the bank is subject to loan prepayments and deposit withdrawals. Among other things, we find that greater volatility of interest rates tends to increase the margin. The strength of the correlation between the level of interest rates and the propensity to prepay loans (withdraw deposits) also plays an interesting role.