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The impact of sovereign rating changes on European syndicated loan spreads: The role of the rating-based regulation

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  • Drago, Danilo
  • Gallo, Raffaele

Abstract

We analyze the impact of sovereign rating changes on European corporate loan spreads. We demonstrate that sovereign downgrades lead to significant increases in the spread of loans to domestic firms. We find evidence that the negative effects of a sovereign downgrade are widespread across all firms, also unrated, which are the majority of firms in the European syndicated loan market. A relevant part of this impact depends on the reliance of financial regulation on credit ratings (certification effect), which reduces also loan size and leads to additional burdens for investment grade firms. Instead, we do not find evidence of a significant impact generated by an upgrade. Our results hold also controlling for the sovereign risk, crisis periods, lender characteristics, and endogeneity of loan contract terms.

Suggested Citation

  • Drago, Danilo & Gallo, Raffaele, 2017. "The impact of sovereign rating changes on European syndicated loan spreads: The role of the rating-based regulation," Journal of International Money and Finance, Elsevier, vol. 73(PA), pages 213-231.
  • Handle: RePEc:eee:jimfin:v:73:y:2017:i:pa:p:213-231
    DOI: 10.1016/j.jimonfin.2017.02.029
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    References listed on IDEAS

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    Cited by:

    1. repec:eee:jimfin:v:79:y:2017:i:c:p:39-71 is not listed on IDEAS
    2. Boumparis, Periklis & Milas, Costas & Panagiotidis, Theodore, 2017. "Economic policy uncertainty and sovereign credit rating decisions: Panel quantile evidence for the Eurozone," Journal of International Money and Finance, Elsevier, vol. 79(C), pages 39-71.

    More about this item

    Keywords

    Sovereign credit rating; Loan spread; Financial regulation; Certification effect; Bank credit supply;

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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