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Maturity and Corporate Loan Pricing

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  • Aron A. Gottesman
  • Gordon S. Roberts

Abstract

We investigate the relation between corporate loan spreads and maturity to test whether lenders are compensated for longer maturity loans (tradeoff hypothesis) or limit their exposure by forcing riskier borrowers to take short-term loans (credit-quality hypothesis). Earlier studies reject the tradeoff hypothesis. We use the LPC DealScan database to create a matched sample of pairs of loans to the same borrower on the same day holding credit quality constant. We perform mean of difference tests and cross-sectional and regression analyses, and find evidence supporting both the tradeoff and credit quality hypotheses. Copyright 2004 by the Eastern Finance Association.

Suggested Citation

  • Aron A. Gottesman & Gordon S. Roberts, 2004. "Maturity and Corporate Loan Pricing," The Financial Review, Eastern Finance Association, vol. 39(1), pages 55-77, February.
  • Handle: RePEc:bla:finrev:v:39:y:2004:i:1:p:55-77
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    Citations

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    Cited by:

    1. Vink, Dennis, 2007. "An Empirical Analysis of Asset-Backed Securitization," MPRA Paper 10382, University Library of Munich, Germany, revised 25 Aug 2008.
    2. Khieu, Hinh D. & Mullineaux, Donald J. & Yi, Ha-Chin, 2012. "The determinants of bank loan recovery rates," Journal of Banking & Finance, Elsevier, vol. 36(4), pages 923-933.
    3. Guglielmo Maria Caporale & Suman Lodh & Monomita Nandy, 2015. "How Has the Global Financial Crisis Affected Syndicated Loan Terms in Emerging Markets? Evidence from China," Discussion Papers of DIW Berlin 1481, DIW Berlin, German Institute for Economic Research.
    4. Degryse, Hans & Havrylchyk, Olena & Jurzyk, Emilia & Kozak, Sylwester, 2012. "Foreign bank entry, credit allocation and lending rates in emerging markets: Empirical evidence from Poland," Journal of Banking & Finance, Elsevier, vol. 36(11), pages 2949-2959.
    5. Daniels, Kenneth & Ramirez, Gabriel G., 2007. "Debt restructurings, holdouts, and exit consents," Journal of Financial Stability, Elsevier, vol. 3(1), pages 1-17, April.
    6. Gottesman, Aron A. & Nam, Jouahn & Thornton Jr., John H. & Wynne, Kevin, 2010. "NYSE listings and firm borrowing costs: An empirical investigation," Global Finance Journal, Elsevier, vol. 21(1), pages 26-42.
    7. Degryse, H.A. & Havrylchyk, O. & Jurzyk, E. & Kozak, S., 2009. "Foreign Bank Entry and Credit Allocation in Emerging Markets," Discussion Paper 2009-94, Tilburg University, Center for Economic Research.
    8. Ginés Hernández-Cánovas & Pedro Martínez-Solano, 2010. "Relationship lending and SME financing in the continental European bank-based system," Small Business Economics, Springer, vol. 34(4), pages 465-482, May.
    9. Nandy, Debarshi K., 2010. "Why do firms denominate bank loans in foreign currencies? Empirical evidence from Canada and U.K," Journal of Economics and Business, Elsevier, vol. 62(6), pages 577-603, November.
    10. Tribo Gine, José Antonio & Surroca Aguilar, Jorge & Kim, Moshe, 2009. "The effect of social capital on financial capital," INDEM - Working Paper Business Economic Series id-09-02, Instituto para el Desarrollo Empresarial (INDEM).
    11. Nandy, Monomita & Lodh, Suman, 2012. "Do banks value the eco-friendliness of firms in their corporate lending decision? Some empirical evidence," International Review of Financial Analysis, Elsevier, vol. 25(C), pages 83-93.
    12. Chateau, J.-P. & Wu, J., 2007. "Basel-2 capital adequacy: Computing the `fair' capital charge for loan commitment `true' credit risk," International Review of Financial Analysis, Elsevier, vol. 16(1), pages 1-21.
    13. Roberts, Gordon & Yuan, Lianzeng (Edward), 2010. "Does institutional ownership affect the cost of bank borrowing?," Journal of Economics and Business, Elsevier, vol. 62(6), pages 604-626, November.
    14. Chateau, John-Peter D., 2009. "Marking-to-model credit and operational risks of loan commitments: A Basel-2 advanced internal ratings-based approach," International Review of Financial Analysis, Elsevier, vol. 18(5), pages 260-270, December.
    15. Meneghetti, Costanza, 2012. "Managerial Incentives and the Choice between Public and Bank Debt," Journal of Corporate Finance, Elsevier, vol. 18(1), pages 65-91.
    16. Chateau, John-Peter D., 2007. "Beyond Basel-2 simplified standardized approach: Credit risk valuation of short-term loan commitments," International Review of Financial Analysis, Elsevier, vol. 16(5), pages 412-433.
    17. Goss, Allen & Roberts, Gordon S., 2011. "The impact of corporate social responsibility on the cost of bank loans," Journal of Banking & Finance, Elsevier, vol. 35(7), pages 1794-1810, July.
    18. Vu, Tram & Do, Viet & Skully, Michael, 2015. "Local versus foreign banks: A home market advantage in loan syndications," International Review of Financial Analysis, Elsevier, vol. 37(C), pages 29-39.
    19. Kim, Moshe & Surroca, Jordi & Tribó, Josep A., 2014. "Impact of ethical behavior on syndicated loan rates," Journal of Banking & Finance, Elsevier, vol. 38(C), pages 122-144.

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