Lending Relationships Along Ownership Lines: Institutional Cross-Ownership and Bank Loan Contracts

43 Pages Posted: 12 May 2021

See all articles by Zhiming Ma

Zhiming Ma

Peking University

Edward Owens

University of Utah - David Eccles School of Business

Derrald Stice

The University of Hong Kong - School of Business

Danye Wang

University of Iowa

Date Written: May 11, 2021

Abstract

We find that banking relationships built through institutional cross-ownership influence the granting of loans as well as loan contract terms. Specifically, firms newly added to institutional cross-owners’ portfolios are more likely to borrow from banks that previously issued loans to other firms with the same institutional cross-ownership within the previous three years. These related banks also charge lower loan interest spreads than unrelated banks, and this effect is stronger for borrowers with high information asymmetry, low accounting quality, more financial constraints, and with dedicated institutional cross-owners. Both the lending probability and interest spread effects are robust to different fixed effects specifications as well as to a difference-in-differences analysis using the quasi-experimental setting of financial institution mergers. Overall, our study provides new insights on the role of institutional cross-ownership in the formation of lending relationships.

Keywords: Debt contracting, cross-ownership, lending relationships

JEL Classification: G10, G21, M41

Suggested Citation

Ma, Zhiming and Owens, Edward and Stice, Derrald and Wang, Danye, Lending Relationships Along Ownership Lines: Institutional Cross-Ownership and Bank Loan Contracts (May 11, 2021). Available at SSRN: https://ssrn.com/abstract=3843919 or http://dx.doi.org/10.2139/ssrn.3843919

Zhiming Ma

Peking University ( email )

Department of Accounting
Guanghua School of Management
Beijing, 100871
China

Edward Owens

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States
8015815732 (Phone)

Derrald Stice (Contact Author)

The University of Hong Kong - School of Business ( email )

Meng Wah Complex
Pokfulam Road
Hong Kong
China

Danye Wang

University of Iowa ( email )

341 Schaeffer Hall
Iowa City, IA 52242-1097
United States

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