Do Shareholder Rights Affect the Cost of Bank Loans?

Chava, Sudheer; Livdan, Dmitry; Purnanandam, Amiyatosh

doi:10.2139/ssrn.495853

Do Shareholder Rights Affect the Cost of Bank Loans?

EFA 2004 Maastricht Meetings Paper No. 5061

51 Pages Posted: 3 Aug 2004 Last revised: 26 Oct 2015

See all articles by Sudheer Chava

Sudheer Chava

Georgia Institute of Technology - Scheller College of Business

Amiyatosh Purnanandam

University of Michigan, Stephen M. Ross School of Business

There are 2 versions of this paper

Date Written: February 18, 2008

Abstract

Using data on over 6000 loans issued to US firms between 1990 and 2004, we find that lower takeover defenses (as proxied by lower G-index of Gompers, Ishii and Metrick (2003)) significantly increase the cost of bank loans for a firm. Firms with lowest takeover defense (democracy) pay 25% higher spread on their bank loans as compared to firms with the highest takeover defense (dictatorship), after controlling for various firm and loan characteristics. Further investigations indicate that banks charge higher loan spread to firms with higher takeover vulnerability mainly because of their concern about a substantial increase in financial risk after the takeover. Our results have important implications for understanding the link between a firm's governance structure and its cost of capital. Our study suggests that firms that rely too much on corporate control market as a governance device are punished by costlier bank loans.

Keywords: Corporate governance, shareholder rights, investor protection, hostile takeovers, bank loans, loan spreads

JEL Classification: D23, G21, G32, K42

Suggested Citation: Suggested Citation

Chava, Sudheer and Livdan, Dmitry and Purnanandam, Amiyatosh, Do Shareholder Rights Affect the Cost of Bank Loans? (February 18, 2008). EFA 2004 Maastricht Meetings Paper No. 5061, Available at SSRN: https://ssrn.com/abstract=495853 or http://dx.doi.org/10.2139/ssrn.495853