The Diplomacy Discount in Global Syndicated Loans

72 Pages Posted: 3 Dec 2020

See all articles by Gene Ambrocio

Gene Ambrocio

Bank of Finland

Xian Gu

Durham University Business School

Iftekhar Hasan

Fordham University ; Bank of Finland; University of Sydney

Panagiotis N. Politsidis

The University of Sydney

Date Written: September 8, 2020

Abstract

We investigate whether state-to-state political ties with a global superpower affects the pricing of international syndicated bank loans. We find statistically and economically significant effects of stronger state political ties with the United States, arguably the most dominant global superpower of our times, on the pricing of global syndicated loans. A one standard deviation improvement in state political ties between the U.S. and the government of a borrower's home country is associated with 14 basis points lower loan spread. This is equivalent to a cumulative savings in loan interest payments of about 10 million USD for the average loan in our sample. The effect of political ties on loan pricing is also stronger when lead arrangers are U.S. banks, during periods in which the U.S. is engaged in armed conflicts such as in the Afghan, Iraq and Syrian wars, when the U.S. president belongs to the Republican Party, and for borrowers with better balance sheets and prior lending relationships. Notably, we find that not all firms exploit this mechanism, as cross-listed firms and firms in countries with strong institutional quality and ability to attract institutional investors are much less reliant on political ties for lowering their borrowing costs.

Keywords: Global syndicated loans, Political ties, Loan pricing

JEL Classification: G15, G21, G30, F50

Suggested Citation

Ambrocio, Gene and Gu, Xian and Hasan, Iftekhar and Politsidis, Panagiotis N., The Diplomacy Discount in Global Syndicated Loans (September 8, 2020). Available at SSRN: https://ssrn.com/abstract=3703161 or http://dx.doi.org/10.2139/ssrn.3703161

Gene Ambrocio

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

Xian Gu

Durham University Business School ( email )

Mill Hill Lane
Durham, DH1 3LB
United Kingdom

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

Panagiotis N. Politsidis (Contact Author)

The University of Sydney ( email )

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

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