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Expected stock price crash risk and bank loan pricing: Evidence from China's listed firms

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  • Gu, Xiaolong
  • Xin, Yu
  • Xu, Liping

Abstract

This study investigates whether the stock price crash risk is priced in private debt contracting. We find that the expected stock price crash risk is positively associated with the bank loan interest spread, indicating that banks consider stock price crashes to be an important risk factor when issuing loans. In the Chinese context, we further show that the positive association between the expected stock price crash risk and the bank loan interest spread disappears when the loan-issuing bank is a major state-owned bank and when the borrowing firm has political connections. However, state influence and social networks mainly have effects in areas with poor legal environments. Finally, we find that when the crash risk is perceived to be high, the loan maturity is shorter. These findings indicate that Chinese banks use the price terms to reap risk premiums and non-price terms to control the credit risk, but only in areas with strong formal institutions.

Suggested Citation

  • Gu, Xiaolong & Xin, Yu & Xu, Liping, 2019. "Expected stock price crash risk and bank loan pricing: Evidence from China's listed firms," Pacific-Basin Finance Journal, Elsevier, vol. 57(C).
  • Handle: RePEc:eee:pacfin:v:57:y:2019:i:c:s0927538x18306036
    DOI: 10.1016/j.pacfin.2019.06.013
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    Keywords

    Crash risk; Loan pricing; Political connection; State influence; Marketization;

    JEL classification:

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

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