The Evolution of Corporate Borrowers: Prime Versus Libor

28 Pages Posted: 17 Oct 2004

Date Written: July 27, 2004

Abstract

We extend Diamond's (1989, 1991) framework to posit that once they reach the stage of bank borrowing, firms begin with prime loans and evolve toward borrowing more cheaply at LIBOR as they grow larger, less risky and less characterized by asymmetric information. To test our extended life-cycle hypothesis, we conduct multinomial logit regressions to explain firms' membership in one of three groups: prime only, prime and LIBOR, and LIBOR. We also examine spreads over prime and LIBOR and find that loans set up to allow borrowing at prime carry higher spreads than those allowing borrowing at LIBOR as predicted by the life-cycle hypothesis.

Keywords: Corporate loans, prime, LIBOR

JEL Classification: G2, G32

Suggested Citation

McGraw, Patricia A. and Panyagometh, Kamphol, The Evolution of Corporate Borrowers: Prime Versus Libor (July 27, 2004). Available at SSRN: https://ssrn.com/abstract=604141 or http://dx.doi.org/10.2139/ssrn.604141

Patricia A. McGraw (Contact Author)

Ryerson University ( email )

Ryerson University, 350 Victoria Street, Toronto
Toronto, Ontario M5B 2K3
Canada

Kamphol Panyagometh

NIDA Business School ( email )

118 Seri Thai
Bangkapi
Bangkok
Thailand

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