Who lends to riskier and lower-profitability firms? Evidence from the syndicated loan market

Iosifidi, Maria and Kokas, Sotirios (2015): Who lends to riskier and lower-profitability firms? Evidence from the syndicated loan market.

Abstract

This paper exploits a unique data set on bank-firm relationships based on syndicated loan deals to examine the effect of banks’ credit risk and capital on firms’ risk and performance. Our data set is a multilevel cross-section, which essentially allows controlling for all bank and firm characteristics through respective fixed effects, thus avoiding concerns regarding omitted variables. We find that banks with higher credit risk are associated with more risky firms, with lower profitability and market value. In turn, we find that banks with higher risk-weighted capital ratios lend to riskier firms with less market value. Our results are indicative of a strong adverse selection mechanism and highlight the need to monitor the risky banks more closely, especially as we consider large and influential syndicated loan deals.

• Item Type: MPRA Paper
• Language: English
• Keywords: Bank-firm relationships; Risk; Performance; Syndicated loans
• Subjects: G - Financial Economics > G2 - Financial Institutions and Services > G20 - General; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages; G - Financial Economics > G3 - Corporate Finance and Governance > G30 - General; G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill

References

Adams, R.B., Ferreira, D., 2009. Women in the boardroom and their impact on governance and performance. Journal of Financial Economics 94, 291-309. Akerlof, G. 1970. The market for ‘lemons’: Quality uncertainty and the market mechanism. Quarterly Journal of Economics 84, 488-500. Bester, H., 1985. Screening vs rationing in credit markets with imperfect information. American Economic Review 75, 850-855. Bhattacharya, S., Thakor, A.V., 1993. Contemporary banking theory. Journal of Financial Intermediation 3, 2-50. Bushman, R.M., Williams, C.D., 2012. Accounting discretion, loan loss provisioning, and discipline of banks’ risk-taking. Journal of Accounting and Economics 54, 1-18. Dahl, D., Shrieves, R., 1992. The relationship between risk and capital in commercial banks, Journal of Banking & Finance 16, 439-457. Delis, M.D., Gaganis, C., Hasan, I., Pasiouras, F., 2014. Genetic diversity in the origin countries of board directors and corporate performance. Mimeo. Diamond, D.W., Rajan, R.G., 2000. A theory of bank capital. Journal of Finance 55, 2431-2465. Diamond, D.W., Rajan, R.G., 2001. Liquidity risk, liquidity creation, and financial fragility: A theory of banking. Journal of Political Economy 109, 287-327. Dybvig, P.H., Warachka, M., 2013. Tobin's q does not measure firm performance: Theory, empirics, and alternative measures. Available at http://ssrn.com/abstract=1562444. Fernández, A. and González, F., 2005. How accounting and auditing systems can counteract risk-shifting of safety nets in banking? Some international evidence. Journal of Financial Stability 1, 466-500. Fu, M., Lin, R., Molyneux, P., 2014. Bank competition and financial stability in the Asia-pacific. Journal of Banking and Finance 38, 64-77. Giannetti, M., 2003. Bank-firm relationships and contagious banking crises. Journal of Money, Credit and Banking 35, 239-261. Gormley, T.A., Matsa, D.A., 2014. Common errors: How to (and not to) control for unobserved heterogeneity. Review of Financial Studies 27, 617-661. Gorton, G., Winton, A., 2000. Liquidity provision, bank capital, and the macroeconomy. Available at http://ssrn.com/abstract=253849. Grier, W.A., 2007. Credit Analysis of Financial Institutions. Euromoney Institutional Investor Plc., London, UK. Hellmann, T.F., Murdock, K.C., Stiglitz, J.E., 2000. Liberalization, moral hazard in banking, and prudential regulation: Are capital requirements enough? American Economic Review 90, 147-165. Hitt, M.A., Hoskisson, R.E., Kim, H., 1997. International diversification: Effects on innovation and firm performance in product-diversified firms. Academy of Management Journal 40, 767-798. Hoshi, T., Kashyap, A., Scharfstein, D., 1991. Corporate structure, liquidity, and investment: Evidence from Japanese panel data. Quarterly Journal of Economics 27, 33-60. Jiménez G., Ongena, S., Peydró, J.L., Saurina, J., 2012. Credit supply and monetary policy: Identifying the bank balance-sheet channel with loan applications. American Economic Review 102, 2301-2326. Jiménez G., Ongena, S., Peydró, J.L., Saurina, J., 2014. Hazardous times for monetary policy: What do twenty-three million bank loans say about the effects of monetary policy on credit risk? Econometrica 82, 463-505. Jokipii, T., Milne, A., 2011. Bank capital buffer and risk adjustment decisions. Journal of Financial Stability 7, 165-178. Jones, J.D., Lang, W.W., Nigro, P.J., 2005. Agent bank behavior in bank loan syndications. Journal of Financial Research 28, 385-402. Laeven, L., Levine, R., 2009. Bank governance, regulation and risk taking. Journal of Financial Economics 93, 259-275. Murfin, J., 2012. The supply-side determinants of loan contract strictness. Journal of Finance 67, 1565-1601. Peek, J., Rosengren, E.S., 2005. Unnatural selection: Perverse incentives and the misallocation of credit in Japan. American Economic Review 95, 1144-1166. Rajan, R.G., 1992. Insiders and outsiders: The choice between informed and arm’s-length credit, Journal of Finance 47, 1367-400. Repullo, R., 2004. Capital requirements, market power, and risk-taking in banking. Journal of Financial Intermediation 13, 156-182. Robb, A.M., Watson, J., 2012. Gender differences in firm performance: Evidence from new ventures in the United States. Journal of Business Venturing 27, 544-558. Stiglitz, J., Weiss, A., 1981. Credit rationing in markets with imperfect information. American Economic Review 71, 393-410.