Is The Corporate Loan Market Globally Integrated? A Pricing Puzzle

Abstract

We offer evidence that interest rate spreads on syndicated loans to corporate borrowers are economically significantly smaller in Europe than in the U.S., other things equal. Differences in borrower, loan and lender characteristics associated with equilibrium mechanisms suggested in the literature do not appear to explain the phenomenon. Borrowers overwhelmingly issue in their natural home market, and bank portfolios display significant home "bias." This may explain why pricing discrepancies are not competed away, but the fundamental causes of the discrepancies remain a puzzle. Thus, important determinants of loan origination market outcomes remain to be identified, home "bias" appears to be material for pricing, and corporate financing costs differ in Europe and the U.S.

Is the Corporate Loan Market Globally Integrated? A Pricing Puzzle

“…This hypothesis might explain cross‐market differences in pricing if lender nationality is correlated with pricing, since the market share of lenders varies with lender nationality. However, as Panel A of Table XI shows, when we add variables measuring the fraction of lenders domiciled in the various nationality groups, most coefficients are economically small and statistically insignificant, others are not robustly significant, and the coefficients on the European market dummies are similar to those of the base case (see Carey and Nini (2004) for more details). This is also true when we use the fraction of lead lenders from each nationality (right columns of Table XI).…”

“…Panel C displays a bit of a trend toward relatively lower European market spreads, but no trend is evident in the other panels. Regression results tabulated in Carey and Nini (2004) provide more formal evidence that there has been no statistically significant trend in average pricing differences over time.…”

“…Dollar‐denominated subsample characteristics are generally similar to those of the full pricing sample, but the number of European market observations drops by about half. To save space in the remainder of the paper, we report most regression results only for the dollar‐denominated sample, but results are similar for both pricing samples; a full set of results for the full regression sample is tabulated in Carey and Nini (2004).…”

“…Results are similar when a representative set of all factors is included. Detailed tabulations of such results can be found in Carey and Nini (2004).…”

“…However, the smaller number of European market loans in this subsample sometimes hinders our ability to test other hypotheses. In such cases, we report results for the full regression sample and, as noted previously, all results for the full sample are tabulated in Carey and Nini (2004).…”