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Do Information Rents in Loan Spreads Persist over the Business Cycles?

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Abstract

In this paper, we seek empirical evidence for information rents in loan spreads by analyzing a sample of UK syndicated loan contracts for the period from 1996 to 2005. We use various measures for borrower opaqueness and control for bank, borrower and loan characteristics and we find that undercapitalized banks charge approximately 34 bps higher loan spreads for loans to opaque borrowers. We further analyze whether this effect persists throughout the business cycle and find that this effect prevails only during recessions. However, we do not find evidence that banks exploit their information monopolies during expansion phases.

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Notes

  1. The works of Berger and Udell (1995), Petersen and Rajan (1994, 1995), Schenone (2010), Santos and Winton (2008), and Saunders and Steffen (2011) are notable exceptions.

  2. There is some evidence for this effect in the work of Hubbard et al. (2002). Due to the time series limitation of their data, these authors were unable to explore this idea further.

  3. Similarly, Santos and Winton (2008) use public debt market access as a proxy for high and low switching costs.

  4. Companies House is the national institution that is responsible for storing all company information that is provided under the UK’s Companies Act 1985. The information that is provided includes the filings, industry affiliations, legal forms and dates of incorporation for all companies.

  5. We use financial statement data for all borrowers and lenders from the year prior to the transactions.

  6. EuroCOIN is constructed using a data set that covers approximately 1,000 monthly variables from the six largest economies of the Euro area. The variables included are industrial production, consumer and producer prices, trade variables, money, stock prices and exchange rates, interest rates, labor market-related variables and surveys, among others.

  7. Four consecutive quarters of below-average growth in GDP indicates long-term economic weakness; this method is consistent with the methods that are used for US Stock-Watson indices in earlier literature.

  8. Firm size is the natural logarithm of a firm’s total assets. In unreported tests, we also used operating revenues as a proxy for firm risk. Substituting variables for one another does not affect the results.

  9. We explicitly control for general corporate purposes, corporate control, capital structure and project finance-related purposes.

  10. The results change after the fourth decimal point.

  11. We further use rated vs. unrated as an additional proxy to test for switching costs (compare to the works of Hubbard et al. (2002) and Bosch and Steffen (2011)) and find consistent and statistically significant results. Tables are available upon request.

  12. We further account for lender country effects by excluding all non-UK banks, and we find that all of our results hold consistently. Tables are available upon request.

  13. Note that credit spread is included in absolute terms in contrast with recession versus expansion and whether loans were issued before or after 2001, which were binary variables.

  14. The regressions are not reported for brevity but are available from the author upon request.

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Authors and Affiliations

  1. Johann Wolfgang Goethe-Universität Frankfurt am Main, House of Finance, Grüneburgplatz 1, 60323, Frankfurt am Main, Germany

    Julian A. Mattes & Mark Wahrenburg

  2. ESMT European School of Management and Technology, Schlossplatz 1, 10178, Berlin, Germany

    Sascha Steffen

Authors
  1. Julian A. Mattes
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  2. Sascha Steffen
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  3. Mark Wahrenburg
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Corresponding author

Correspondence to Sascha Steffen.

Additional information

A previous version of this paper circulated under its former title “Syndicated Loans, Lending Relationships and the Business Cycle”. The authors thank Christophe Godlewski, Hendrik Hakenes, Roman Inderst, Victoria Ivashina, Christian Laux, Jan Krahnen, Lars Norden, Darius Palia, Jörg Rocholl, Martin Weber, Andrew Winton, and participants at the Southern Finance Association Annual Meeting, Northern Finance Association Meeting, German Finance Association Annual Meeting, French Finance Association Annual Meeting, “Bankenworkshop” at Münster, and the “Workshop for Banking and Finance” at the University of Mannheim for valuable comments and suggestions. All remaining errors are our own.

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Mattes, J.A., Steffen, S. & Wahrenburg, M. Do Information Rents in Loan Spreads Persist over the Business Cycles?. J Financ Serv Res 43, 175–195 (2013). https://doi.org/10.1007/s10693-012-0129-z

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  • DOI: https://doi.org/10.1007/s10693-012-0129-z

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