Loan Officers' Generalized Trust and International Syndicated Loans

Abstract

We examine generalized trust's effect on the terms of international syndicated loans. Lenders' generalized trust towards citizens of a borrower's country reduces loan spreads, relaxes covenants, and increases loan amount. The results hold using an instrumental variable approach and employing the Iraq War as a shock to French and German trust to US citizens. We further find that these effects are mitigated when prior lending relationships increase and that lenders are less likely to reduce loans to trusted borrowers during the financial crisis. Overall, we provide novel evidence on the effect of a country-level informal institution on international syndicated loans.

Keywords: International syndicated loan, generalized trust, cultural bias, loan spread, covenant, loan accessibility, instrumental variable approach JEL Classification: F34, G02, G15

JEL Classification: F34, G02, G15