Firm Trustworthiness and Bank Loan Pricing

57 Pages Posted: 5 Mar 2020

See all articles by Konan Chan

Konan Chan

National Chengchi Unversity (NCCU) - Finance

Weiyu Kuo

National Chengchi University (NCCU) - Department of International Business

Chih-Yung Lin

National Chiao-Tung University

Tse-Chun Lin

The University of Hong Kong - Faculty of Business and Economics

Date Written: February 10, 2020

Abstract

Using a novel dataset of firm-level perceived trustworthiness from the news media and social media, we find that lending banks charge significantly higher loan spread on firms with lower trustworthiness. Loans to these firms also tend to have shorter loan maturities, more financial covenants, and higher likelihoods of requiring collateral. We further use the Regulation SHO Pilot program as an exogenous variation and find that the effects of trustworthiness are reduced when pilot firms are better disciplined by short sellers. That is, banks have relied less on soft information like trustworthiness when the overall information and governance environments regarding the borrowing firms are improved. Last, firm trustworthiness effects are stronger for firms with high corruption culture, weak corporate governance, and higher information asymmetry. Collectively, our results suggest that perceived firm trustworthiness from the stakeholders conveys valuable credit quality information to bank loan lenders.

Keywords: bank loan pricing, firm trustworthiness, Pilot program, information asymmetry, textual analysis

JEL Classification: G21, G30, G41, M14, Z10

Suggested Citation

Chan, Konan and Kuo, Weiyu and Lin, Chih-Yung and Lin, Tse-Chun, Firm Trustworthiness and Bank Loan Pricing (February 10, 2020). Available at SSRN: https://ssrn.com/abstract=3535237 or http://dx.doi.org/10.2139/ssrn.3535237

Konan Chan

National Chengchi Unversity (NCCU) - Finance ( email )

No. 64, Chih-Nan Road
Section 2
Taipei, 11623
Taiwan
+886-2-29393091 ext 81239 (Phone)

Weiyu Kuo

National Chengchi University (NCCU) - Department of International Business ( email )

Taipei City
Taiwan

Chih-Yung Lin (Contact Author)

National Chiao-Tung University ( email )

Taiwan

Tse-Chun Lin

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

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