Prestige and Loan Pricing

CFS WP No. 544

52 Pages Posted: 12 Oct 2016

See all articles by Alexander Muermann

Alexander Muermann

WU (Vienna University of Economics and Business); Vienna Graduate School of Finance (VGSF)

Thomas Rauter

University of Chicago - Booth School of Business

Date Written: January 28, 2016

Abstract

We find that prestigious companies pay lower spreads and upfront fees on their loans despite the fact that prestige does not predict default risk over the life of the loan. Using survey data on firm-level prestige, we show that a one standard deviation increase in prestige reduces loan spreads by 6.18% per year and upfront fees by 22.86%. We identify causal effects (i) using fraud by industry peers as an instrument for borrower prestige and (ii) exploiting a regression discontinuity around rank 100 of the prestige survey. Banks that lend to prestigious firms attract more business afterwards compared to otherwise similar institutions. Moreover, the effect of prestige on upfront fees is particularly strong for new bank relationships. Our findings suggest that prestigious firms receive cheaper funding because the associated lending relationship helps banks establish valuable credentials they use to compete for future borrowers.

Keywords: Loan Pricing, Firm Prestige, Bank Incentives

JEL Classification: G21, G30, G32

Suggested Citation

Muermann, Alexander and Rauter, Thomas, Prestige and Loan Pricing (January 28, 2016). CFS WP No. 544. Available at SSRN: https://ssrn.com/abstract=2850570 or http://dx.doi.org/10.2139/ssrn.2850570

Alexander Muermann (Contact Author)

WU (Vienna University of Economics and Business) ( email )

Welthandelsplatz 1
A - 1020 Wien
Austria
+43 1 31336 4948 (Phone)
+43 1 31336 90 4948 (Fax)

Vienna Graduate School of Finance (VGSF) ( email )

Welthandelsplatz 1
A - 1020 Wien
Austria

Thomas Rauter

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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