When Do Foreign Banks Finance Domestic Projects? New Evidence on the Importance of Legal and Financial Systems

42 Pages Posted: 23 Sep 2004

Date Written: September 22, 2004

Abstract

This paper analyzes how different legal and financial systems affect the composition of loan syndicates, and how the composition, in turn, affects loan pricing. In contrast with previous work on the availability and allocation of external finance, I study the supply of long-term funds to large, illiquid project companies located in 61 countries. Using a sample of 495 loan tranches worth $151 billion, I find that foreign banks provide a greater share of total funds in countries with stronger creditor rights, stronger legal enforcement, less-developed financial systems, and less government ownership of banking assets. I also find that loan spreads and fees are positively related to the fraction of total funds provided by foreign banks. These findings show that both legal and financial systems affect the availability of funds, the pricing of funds, and, presumably, capital investment decisions and economic growth.

Keywords: Creditor rights, legal origin, project finance, bank loan, economic development

JEL Classification: G2, K0, O1, P5

Suggested Citation

Esty, Benjamin C., When Do Foreign Banks Finance Domestic Projects? New Evidence on the Importance of Legal and Financial Systems (September 22, 2004). Available at SSRN: https://ssrn.com/abstract=594526 or http://dx.doi.org/10.2139/ssrn.594526

Benjamin C. Esty (Contact Author)

Harvard Business School ( email )

Boston, MA 02163
United States

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