Local Economic Freedom and The Cost of Corporate Borrowing: Evidence From The US States

41 Pages Posted: 8 Sep 2022 Last revised: 28 Oct 2022

See all articles by Thanh Cong Nguyen

Thanh Cong Nguyen

Phenikaa University

Theodora Bermpei

University of Essex

Antonios Nikolaos Kalyvas

University of Kent; Department of Banking and Finance, Southampton Business School, University of Southampton

Date Written: August 11, 2022

Abstract

Using data on syndicated bank loans, we show that higher local (state-level) economic freedom reduces the cost of bank credit for US firms. A one standard deviation increase in local economic freedom, similar to the difference in economic freedom between Pennsylvania and Texas, decreases loan spreads by around 13 basis points (or $1.5 million interest for the average loan). We further show that freedom from government spending and taxation are the economic freedom components that drive this relationship. Labor market freedom also assists in reducing loan spreads for smaller firms and when the local economic growth potential is higher. We also find that economic freedom loosens non-price loan contract terms such as maturity, fees, and general covenants. These results denote that increased local economic freedom could assist the development of the local private sector from a bank credit standpoint.

Keywords: Economic freedom; Cost of bank loans; Nonprice loan terms

JEL Classification: G21, L11

Suggested Citation

Nguyen, Thanh Cong and Bermpei, Theodora and Kalyvas, Antonios Nikolaos, Local Economic Freedom and The Cost of Corporate Borrowing: Evidence From The US States (August 11, 2022). Available at SSRN: https://ssrn.com/abstract=4187774 or http://dx.doi.org/10.2139/ssrn.4187774

Thanh Cong Nguyen (Contact Author)

Phenikaa University ( email )

To Huu road, Yen Nghia
Ha Dong district
Hanoi, Hanoi 100803
Vietnam

Theodora Bermpei

University of Essex ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

Antonios Nikolaos Kalyvas

University of Kent ( email )

Canterbury, CT2 7NP
United Kingdom

Department of Banking and Finance, Southampton Business School, University of Southampton ( email )

Southampton, SO17 1BJ
United Kingdom

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