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Do Cultural Differences Between Contracting Parties Matter? Evidence from Syndicated Bank Loans

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  • Giannetti, Mariassunta
  • Yafeh, Yishay

Abstract

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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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7020.

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Date of creation: Oct 2008
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Handle: RePEc:cpr:ceprdp:7020

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Keywords: Behavioral Bias; Culture; Financial Contracts; Home Bias; Risk Sharing; Syndicated Loans;

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