How Banks Price Loans for LBOs: an Empirical Analysis of Spread Determinants *

Alves, Paulo; Cunha, M. Ricardo; Pacheco, Luís Krug; Pinto, João

doi:10.1007/s10693-021-00355-y

Cited by 8 publications

(17 citation statements)

References 93 publications

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“…Also, the bank-based or the market-based financial development is not relevant in the capital allocation efficiency (Beck and Levine, 2002). However, with a leveraged buy-out sample, Alves et al (2021) find that borrowers from countries with market-based financial systems bear higher spreads than borrowers from countries with bank-based financial systems.…”

Section: Literature Reviewmentioning

confidence: 84%

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

Moutinho

Alves

Martins

2021

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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.

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Section: Literature Reviewmentioning

confidence: 84%

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

Moutinho

Alves

Martins

2021

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“…In addition, they find that variables capturing market conditions and contractual characteristics also affect the pricing of syndicated loans to LBOs. More recently, Alves et al (2021) show that LBO loan pricing differ significantly in normal versus crisis times, and that law and institutional characteristics are important determinants of spreads for deals closed in market-oriented countries.…”

Section: A Review Of the Empirical Literature On Lbosmentioning

confidence: 99%

“…The distribution by year of loans is described in Table 2. Table 2 shows (Alves et al, 2021). Panel B of Table 3 shows that LBO lending is highly concentrated in five key industries; i.e., manufacturing (32.41%), services (31.52%), retail trade (8.34%), communications (8.00%), and utilities (5.71%) sectors account for 86.35% of all LBO lending value and 85.97% of all loans.…”

Section: **** Insert Table 1 About Here ****mentioning

confidence: 99%

“…In addition, the 2008 financial crisis and the subsequent European sovereign debt crisis manifested a shortage of liquidity and banks lost balance sheet capacity to lend, particularly for longer periods. Additionally, several authors (Marques and Pinto, 2020;Alves et al, 2021) show that the common pricing characteristics of debt instruments are significantly different in pre-versus crisis period. Therefore, this study also examines if this holds for loans to LBOs also, by considering a pre-crisis period from January 1, 2000 through to September 14, 2008, and a crisis period from September 15, 2008 (the first trading day after Lehman Brothers' bankruptcy filing the day before) through to December 31, 2020.…”

Section: **** Insert Table 3 About Here ****mentioning

confidence: 99%

“…While the total value of firms acquired through LBOs between 1970 and2007 has been estimated at about $3.6 trillion, $2.7 trillion of these transactions took place between 2001 and 2007 (Singh, 2017). Despite the financial turmoil in the debt markets after 2008, the total value of firms acquired through LBOs between 2008 and 2020 was sources of wealth gains are also presented as motivations, namely wealth transfers, corporate undervaluation, reduction of transaction costs, and takeover defenses (Renneboog et al, 2007;Alves et al, 2021).…”

Section: Introductionmentioning

confidence: 99%

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