Lending at Arm’s Length: How do Sovereign Ceiling Policies Really Matter for Corporate Borrowers?

68 Pages Posted: 4 Sep 2020 Last revised: 29 Aug 2022

See all articles by Iftekhar Hasan

Iftekhar Hasan

Fordham University ; Bank of Finland; University of Sydney

Suk-Joong Kim

The University of Sydney Business School

Panagiotis N. Politsidis

The University of Sydney

Eliza Wu

The University of Sydney - Business School; Financial Research Network (FIRN)

Date Written: August 23, 2022

Abstract

We examine the effect of firm credit rating downgrades on the pricing of syndicated bank loans following rating downgrades in the firms’ countries of domicile. We find that the sovereign ceiling policies used by credit rating agencies create a disproportionately adverse impact on the bounded firms’ borrowing costs relative to other domestic firms following their sovereign’s rating downgrade. We further show that information asymmetry between lenders and borrowers, as well as within the lending syndicate, constitutes an important mechanism through which the sovereign ceiling rule leads to higher loan spreads. However, we find that not all firms are equally penalized: relationship and cross-listed borrowers with subsidiaries in the lender’s country and borrowers operating in competitive industries are much less affected.

Keywords: Credit ratings, Sovereign ceiling, Bank credit, Relationship lending, Foreign-currency lending, Firm credit constraints

JEL Classification: F34, G21, G24, G28, G32, H63

Suggested Citation

Hasan, Iftekhar and Kim, Suk-Joong and Politsidis, Panagiotis N. and Wu, Eliza, Lending at Arm’s Length: How do Sovereign Ceiling Policies Really Matter for Corporate Borrowers? (August 23, 2022). Available at SSRN: https://ssrn.com/abstract=3661271 or http://dx.doi.org/10.2139/ssrn.3661271

Iftekhar Hasan

Fordham University ( email )

45 COLUMBUS AVENUE
GBA-5TH FLOOR
NEW YORK, NY 10023
United States

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

University of Sydney ( email )

P.O. Box H58
Sydney, NSW 2006
Australia

Suk-Joong Kim

The University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia
+61 2 9114 0940 (Phone)
+61 2 9351 6461 (Fax)

Panagiotis N. Politsidis (Contact Author)

The University of Sydney ( email )

Rm 540, H-69 Codrington Building
The University of Sydney
Sydney, NSW 2006
Australia

Eliza Wu

The University of Sydney - Business School ( email )

University of Sydney
Darlington
Sydney, NSW 2006
Australia

Financial Research Network (FIRN)

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

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

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