Organizational Forms and the Contracts of Bank Loans

Abstract

This paper is the first to consider all three important organizational forms, such as industrial diversification, global diversification, and geographic dispersion, in the empirical framework to find out which types of diversification do matter for the contracting of bank loans. I find that, on average, globally diversified firms could incur a 7.7% to 14.5% additional increase in loan pricing compared to the concentrated firms or the firms that are not diversified at any dimension. The other types of firms incurring a higher cost of bank debt are the firms that are only geographically dispersed, and the firms that are diversified in all three forms. Examining the effects of organizational forms on the non-price loan terms, I observe that covenant restrictions are generally higher for the geographically dispersed firms that are either industrially or globally diversified.

Keywords: Organizational structure; Global diversification; Industrial diversification; Geographic dispersion; Bank-loan contracting

JEL Classification: G31; G32; G14; F23; L22