Do Banks Learn from Other Financial Markets? Evidence from Loan Contract Design

43 Pages Posted: 23 May 2018

See all articles by Huu Nhan Duong

Huu Nhan Duong

Monash University - Department of Banking and Finance; Financial Research Network (FIRN)

S. Ghon Rhee

University of Hawaii - Shidler College of Business; University of Hawaii - Department of Financial Economics and Institutions

Van Vu

Department of Economics and Finance, La Trobe University

Date Written: May 10, 2018

Abstract

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

Suggested Citation

Duong, Huu Nhan and Rhee, S. Ghon and Vu, Van, Do Banks Learn from Other Financial Markets? Evidence from Loan Contract Design (May 10, 2018). Available at SSRN: https://ssrn.com/abstract=3176371 or http://dx.doi.org/10.2139/ssrn.3176371

Huu Nhan Duong

Monash University - Department of Banking and Finance ( email )

Melbourne
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

S. Ghon Rhee

University of Hawaii - Shidler College of Business ( email )

2404 Maile Way
C-304, FEI/CBA
Honolulu, HI 96822
United States

University of Hawaii - Department of Financial Economics and Institutions ( email )

United States

Van Vu (Contact Author)

Department of Economics and Finance, La Trobe University ( email )

Melbourne, 3086
Australia

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