Do Banks Learn from Other Financial Markets? Evidence from Loan Contract Design
43 Pages Posted: 23 May 2018
Date Written: May 10, 2018
We find that banks charge higher loan rates and impose stricter non-price loan terms for borrowers with higher short selling activity and higher option implied volatility skewness. We further find a stronger influence of financial market information for borrowers with opaque information environment. Firms with a higher level of short selling and implied volatility skewness are also more likely to choose bank loans over public bonds. Overall, our results indicate that banks take into account expectation of bad news imbedded in equity short selling activity and in option implied volatility skewness when designing loan contracts.
Keywords: Option implied volatility skewness, Short selling interest, Bank loan contracts
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