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The co-insurance effect hypothesis and the cost of bank loans: Evidence from Indonesian pyramidal business groups

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  • Chandera, Yane
  • Utama, Cynthia Afriani
  • Husodo, Zaäfri Ananto
  • Setia-Atmaja, Lukas

Abstract

This paper empirically tests the relationship between the position of a firm in a pyramidal business group and the firm's bank loan spread, in an Asian emerging market with a high incidence of pyramidal firms, a weak legal system, and high corporate dependency on bank loans. We use a data set of bank loan contracts for Indonesian pyramidal firms from 2006 to 2016. We find that banks charge lower loan prices to firms that are located in lower layers of a pyramidal chain, even after we control for many factors including expropriation risk. The finding suggests that banks consider that lower-layer firms receive a greater co-insurance effect than upper-layer firms because more internal resources are available down the ownership chain to lower credit risk.

Suggested Citation

  • Chandera, Yane & Utama, Cynthia Afriani & Husodo, Zaäfri Ananto & Setia-Atmaja, Lukas, 2018. "The co-insurance effect hypothesis and the cost of bank loans: Evidence from Indonesian pyramidal business groups," Global Finance Journal, Elsevier, vol. 37(C), pages 100-122.
    • Handle: RePEc:eee:glofin:v:37:y:2018:i:c:p:100-122
    DOI: 10.1016/j.gfj.2018.03.003
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    More about this item

    Keywords

    Business group; Pyramid; Co-insurance effect; Cost of debt; Bank loan;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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