Foreign Institutional Ownership and Cross-Border Lending: Evidence from International Syndicated Loans

63 Pages Posted: 28 Sep 2018 Last revised: 19 Apr 2022

See all articles by Xi Li

Xi Li

London School of Economics

Yun Lou

Singapore Management University - School of Accountancy

Date Written: April 19, 2022

Abstract

Foreign banks often shy away from domestic firms due to high information asymmetry and costly monitoring. We hypothesize that foreign institutional shareholders could help domestic firms access foreign debt by playing information and monitoring roles. Information sharing between foreign institutions and foreign banks reduces the information asymmetry. Monitoring by foreign institutional shareholders could alleviate foreign banks’ concerns for borrower moral hazard. Using a sample of international syndicated loans, we find that borrowers’ foreign institutional ownership is positively associated with the participation of foreign banks in loan syndicates. These results are stronger among borrowers with more opaque information environment. We also find that foreign loans rely more on lender monitoring mechanisms when the borrower has higher foreign institutional ownership. Furthermore, borrowers are more likely to borrow from lenders located in the same country as their foreign institutional shareholders. These findings provide support for the information role of borrowers’ foreign institutional shareholders. The evidence on the monitoring role of foreign institutional shareholders is mixed. Lastly, we find that foreign institutional shareholders also help borrowers access foreign debt at a lower price. Overall, our results highlight a distinct information role played by foreign institutional shareholders in global debt markets.

Keywords: Syndicated Loans, Foreign Institutional Ownership, Cross-Border Lending, Information, Monitoring

JEL Classification: G23, G32

Suggested Citation

Li, Xi and Lou, Yun, Foreign Institutional Ownership and Cross-Border Lending: Evidence from International Syndicated Loans (April 19, 2022). Available at SSRN: https://ssrn.com/abstract=3247168 or http://dx.doi.org/10.2139/ssrn.3247168

Xi Li (Contact Author)

London School of Economics ( email )

Department of Accounting
Houghton Street
London, WC2A 2AE
United Kingdom

HOME PAGE: http://www.lse.ac.uk/accounting/people/xi-li

Yun Lou

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

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