Offshore Operations and Bank Loan Contracting: Evidence from Firms that Set Up Subsidiaries in Offshore Financial Centers

65 Pages Posted: 13 Dec 2014 Last revised: 10 Nov 2015

See all articles by Wenxia Ge

Wenxia Ge

University of Manitoba - Asper School of Business

Jeong-Bon Kim

City University of Hong Kong

TieMei Li

University of Ottawa - School of Management

Yutao Li

University of Lethbridge

Date Written: February 13, 2015

Abstract

We examine the effects of a multinational firm’s operations in offshore financial centers (OFCs) on the price and non-price terms of bank loan contracts. Using a sample of firms from 38 countries that have at least one subsidiary in an OFC, we find that intensive offshore operations are associated with unfavorable loan terms, such as higher loan spreads, smaller loan amounts, a higher probability of a loan being secured by collateral, and more prevalent use of restrictive covenants in a loan contract. To address potential endogeneity with respect to the relation between offshore operations and loan terms, we perform firm-fixed effects analyses, reexamine the relation between the two, using the announcement of OFC black and grey lists by the Organization for Economic Co-operation and Development (OECD) in 2002 as an exogenous shock, and analyze the dynamic link between increasing new subsidiaries in poorly-regulated OFCs and loan terms. The results indicate that the intensity of offshore operations affects loan terms unfavorably. We also find that such effects are more pronounced for more opaque firms and for firms that are headquartered in countries or jurisdictions with weaker legal or regulatory enforcement. Our findings indicate that banks and other private lenders view offshore operations as a credit risk-increasing factor, when lending to multinational firms that have subsidiaries in OFCs.

Keywords: offshore operation; offshore financial center; loan contracting; information risk; default risk; legal enforcement

JEL Classification: F34, F36, G15, G21, G32, K22

Suggested Citation

Ge, Wenxia and Kim, Jeong-Bon and Li, TieMei and Li, Yutao, Offshore Operations and Bank Loan Contracting: Evidence from Firms that Set Up Subsidiaries in Offshore Financial Centers (February 13, 2015). 2015 Canadian Academic Accounting Association (CAAA) Annual Conference, Available at SSRN: https://ssrn.com/abstract=2537130

Wenxia Ge (Contact Author)

University of Manitoba - Asper School of Business ( email )

181 Freedman Crescent
Winnipeg, Manitoba R3T 5V4
Canada
1-204-474-9331 (Phone)

Jeong-Bon Kim

City University of Hong Kong ( email )

Department of Accountancy
83 Tat Chee Avenue
Kowloon Tong
Hong Kong
852-3442-7909 (Phone)

TieMei Li

University of Ottawa - School of Management ( email )

136 Jean-Jacques Lussier Street
Ottawa, Ontario K1N 6N5
Canada

Yutao Li

University of Lethbridge ( email )

Lethbridge, Alberta T1K5E8
Canada

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
14
Abstract Views
414
PlumX Metrics