We investigate whether cultural differences between professional decision-makers affect financial contracts in a large dataset of international syndicated bank loans. We find that lead banks offer smaller loans at a higher interest rate to more culturally distant borrowers. Furthermore, lead banks are more likely to require third-party guarantees as cultural distance with the borrower increases. The effects of cultural differences are not confined to the relation between borrower and lender and appear to hamper risk sharing within the syndicate as well. Ceteris paribus, participant banks fund smaller portions of syndicated loans led by culturally distant banks. These cultural biases are not significantly reduced by repeated interaction with the counterparty or with other agents in the foreign country.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
7020.
Find related papers by JEL classification: F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages G3 - Financial Economics - - Corporate Finance and Governance
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