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Journal of Financial Services Research

Erschienen in:

14.10.2020

Political Uncertainty and Bank Loan Contracts: Does Government Quality Matter?

verfasst von: Yin-Siang Huang, Iftekhar Hasan, Ying-Chen Huang, Chih-Yung Lin

Erschienen in: Journal of Financial Services Research | Ausgabe 2-3/2021

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Abstract

We investigate the relation between political uncertainty and bank loan spreads using a sample of loan contracts for the G20 firms during the period from 1982 to 2015. We find that banks charge firms higher loan spreads and require more covenants during election years when domestic political risks are elevated. Greater differences in the support ratios of opinion polls on candidates lead to the lower cost of bank loans. This political effect also lessens when the government quality of the borrower’s country is better than that of the lender’s country. Better quality government can lower the political risk component of bank loan spreads.

Vorheriger Artikel Debit Card Incentives and Consumer Behavior: Evidence Using Natural Experiment Methods

Nächster Artikel Firm Opacity and the Clustering of Stock Prices: the Case of Financial Intermediaries

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Notably, G20 was founded in 1999, and we use this list of countries as our sample.

The determinants of loan contracts are a popular topic in the research in recent years. Studies have investigated have investigated these determinants, such as borrower risk (Strahan 1999), borrower reputation (Diamond 1991; Sufi 2007), legal system or institution (Qian and Strahan 2007; Bae and Goyal 2009), misreporting announcements (Graham et al. 2008), accounting quality (Bharath et al. 2008), creditor rights (Liberti and Mian 2010), financial law improvement (Haselmann et al. 2010), ownership structure (Lin et al. 2011; Borisova and Megginson 2011), and tax avoidance (Hasan et al. 2014), through in-depth analyses.

First, national leaders make decisions through monetary, fiscal, and industrial policies. Therefore, the use of the date of a national election is a natural choice to be a proxy for political uncertainty. Second, Julio and Yook (2012) argue that firms cannot control the timing of elections. Thus, election data provide a natural experimental framework to deal with endogeneity between economic activities and political uncertainty.

Beck et al. (2018) mention argue that distance-related information constraints, such as differences in legal environment or corporate culture between countries of lenders and borrowers, led foreign banks to face an informational disadvantage.

Adair et al. (2001) propose that people facilitate communication and the exploration of alternatives when they share similar norms and codes, for example, a borrower may need a long period of maturity but may be willing to concede on the loan amount.

We also supplement the election data with various internet sources for cases in which election information is missing from the Polity IV database or the Database of Political Institutions and http://www.cidcm.umd.edu/polity/data/, http://www.binghamton.edu/cdp/era/searchera.html, and http://www.electionresources.org/.

We exclude observations with missing information on accounting data or loan spread.

In the 13,475 bank loan contracts, the number of domestic bank loans is 11,146.

In Appendix Table 12, we present the Pearson correlation coefficient matrix of the variables. The correlation coefficients between Election and the other variables are less than 0.0658 and indicate that multicollinearity is not a concern.

In Appendix Table 12, the correlations between Z-score and the spread or leverage are significantly negative, and the correlation between Z-score and profitability is significantly positive. These correlations provide more evidence in support of our empirical results. Thus, banks charge a low spread to firms with high ratings.

Notably, we find similar results if we exclude loan characteristics from the control sets.

In this paper, we investigate following question: do banks ask for more collateral, more total covenants, shorter maturities, and smaller loan amounts during the election years? A study of this question is challenging because all those loan characteristics are jointly determined together with the loan spread (Cerqueiro et al. 2016). Econometrically, all those factors should serve as dependent variables in a system of simultaneous equations. However, that requires as many instrumental variables as the dependent variables. The literature has not resolved this issue.

To save space, we do not report the coefficients for all control variables and dummies of fixed effects. Also, for brevity, we only report the results for the interaction term Election and government quality measures.

Our sample consists of only bank holding companies, commercial banks, and savings banks.

The number of the domestic bank loans from the US is 9774.

For brevity, we only report the results for Spread and TolCov.

For brevity, we only report the results for Spread.

In addition, we use the following rolling event windows [−2 m,+9 m], [−1 m,+8 m], and [0 m,+7 m], and find similar results.

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Titel: Political Uncertainty and Bank Loan Contracts: Does Government Quality Matter?
verfasst von: Yin-Siang Huang
Iftekhar Hasan
Ying-Chen Huang
Chih-Yung Lin
Publikationsdatum: 14.10.2020
Verlag: Springer US
Erschienen in: Journal of Financial Services Research / Ausgabe 2-3/2021
Print ISSN: 0920-8550
Elektronische ISSN: 1573-0735
DOI: https://doi.org/10.1007/s10693-020-00344-7

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