IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/103608.html
   My bibliography  Save this paper

The Diplomacy Discount in Global Syndicated Loans

Author

Listed:
  • Ambrocio, Gene
  • Gu, Xian
  • Hasan, Iftekhar
  • Politsidis, Panagiotis

Abstract

We investigate whether state-to-state political ties with a global superpower affects the pricing of international syndicated bank loans. We find statistically and economically significant effects of stronger state political ties with the United States, arguably the most dominant global superpower of our times, on the pricing of global syndicated loans. A one standard deviation improvement in state political ties between the U.S. and the government of a borrower's home country is associated with 14 basis points lower loan spread. This is equivalent to a cumulative savings in loan interest payments of about 10 million USD for the average loan in our sample. The effect of political ties on loan pricing is also stronger when lead arrangers are U.S. banks, during periods in which the U.S. is engaged in armed conflicts such as in the Afghan, Iraq and Syrian wars, when the U.S. president belongs to the Republican Party, and for borrowers with better balance sheets and prior lending relationships. Notably, we find that not all firms exploit this mechanism, as cross-listed firms and firms in countries with strong institutional quality and ability to attract institutional investors are much less reliant on political ties for lowering their borrowing costs.

Suggested Citation

  • Ambrocio, Gene & Gu, Xian & Hasan, Iftekhar & Politsidis, Panagiotis, 2020. "The Diplomacy Discount in Global Syndicated Loans," MPRA Paper 103608, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:103608
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/103608/1/MPRA_paper_103608.pdf
    File Function: original version
    Download Restriction: no

    File URL: https://mpra.ub.uni-muenchen.de/110701/1/MPRA_paper_110701.pdf
    File Function: revised version
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Sapienza, Paola, 2004. "The effects of government ownership on bank lending," Journal of Financial Economics, Elsevier, vol. 72(2), pages 357-384, May.
    2. Alesina, Alberto & Dollar, David, 2000. "Who Gives Foreign Aid to Whom and Why?," Journal of Economic Growth, Springer, vol. 5(1), pages 33-63, March.
    3. Ambrocio, Gene & Gu, Xian & Hasan, Iftekhar, 2022. "Political ties and raising capital in global markets: Evidence from Yankee bonds," Journal of Corporate Finance, Elsevier, vol. 74(C).
    4. Max Bruche & Frederic Malherbe & Ralf R Meisenzahl, 2020. "Pipeline Risk in Leveraged Loan Syndication," The Review of Financial Studies, Society for Financial Studies, vol. 33(12), pages 5660-5705.
    5. Dario Caldara & Matteo Iacoviello, 2022. "Measuring Geopolitical Risk," American Economic Review, American Economic Association, vol. 112(4), pages 1194-1225, April.
    6. Jonathan D. Jones & William W. Lang & Peter J. Nigro, 2005. "Agent Bank Behavior In Bank Loan Syndications," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 28(3), pages 385-402, September.
    7. Eitan Goldman & Jörg Rocholl & Jongil So, 2009. "Do Politically Connected Boards Affect Firm Value?," The Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2331-2360, June.
    8. Daron Acemoglu & Suresh Naidu & Pascual Restrepo & James A. Robinson, 2019. "Democracy Does Cause Growth," Journal of Political Economy, University of Chicago Press, vol. 127(1), pages 47-100.
    9. Joel F. Houston & Chen Lin & Yue Ma, 2012. "Regulatory Arbitrage and International Bank Flows," Journal of Finance, American Finance Association, vol. 67(5), pages 1845-1895, October.
    10. Hasan, Iftekhar & Hoi, Chun Keung & Wu, Qiang & Zhang, Hao, 2017. "Social Capital and Debt Contracting: Evidence from Bank Loans and Public Bonds," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 52(3), pages 1017-1047, June.
    11. Tobias Berg & Anthony Saunders & Sascha Steffen & Daniel Streitz, 2017. "Mind the Gap: The Difference between U.S. and European Loan Rates," The Review of Financial Studies, Society for Financial Studies, vol. 30(3), pages 948-987.
    12. Delis, Manthos D. & Hasan, Iftekhar & Ongena, Steven, 2020. "Democracy and credit," Journal of Financial Economics, Elsevier, vol. 136(2), pages 571-596.
    13. Joel F. Houston & Liangliang Jiang & Chen Lin & Yue Ma, 2014. "Political Connections and the Cost of Bank Loans," Journal of Accounting Research, Wiley Blackwell, vol. 52(1), pages 193-243, March.
    14. Craig, Ben & Giuzio, Margherita & Paterlini, Sandra, 2019. "The effect of possible EU diversification requirements on the risk of banks' sovereign bond portfolios," ESRB Working Paper Series 89, European Systemic Risk Board.
    15. Alexander W. Butler & Larry Fauver & Sandra Mortal, 2009. "Corruption, Political Connections, and Municipal Finance," The Review of Financial Studies, Society for Financial Studies, vol. 22(7), pages 2673-2705, July.
    16. Ambrocio, Gene & Hasan, Iftekhar, 2021. "Quid pro quo? Political ties and sovereign borrowing," Journal of International Economics, Elsevier, vol. 133(C).
    17. Gabriel Jiménez & Steven Ongena & José‐Luis Peydró & Jesús Saurina, 2014. "Hazardous Times for Monetary Policy: What Do Twenty‐Three Million Bank Loans Say About the Effects of Monetary Policy on Credit Risk‐Taking?," Econometrica, Econometric Society, vol. 82(2), pages 463-505, March.
    18. Acemoglu, Daron & Johnson, Simon & Kermani, Amir & Kwak, James & Mitton, Todd, 2016. "The value of connections in turbulent times: Evidence from the United States," Journal of Financial Economics, Elsevier, vol. 121(2), pages 368-391.
    19. Matías Braun & Claudio Raddatz, 2010. "Banking on Politics: When Former High-ranking Politicians Become Bank Directors," The World Bank Economic Review, World Bank, vol. 24(2), pages 234-279, June.
    20. Tobias Berg & Anthony Saunders & Sascha Steffen, 2016. "The Total Cost of Corporate Borrowing in the Loan Market: Don't Ignore the Fees," Journal of Finance, American Finance Association, vol. 71(3), pages 1357-1392, June.
    21. Brei, Michael & Schclarek, Alfredo, 2013. "Public bank lending in times of crisis," Journal of Financial Stability, Elsevier, vol. 9(4), pages 820-830.
    22. Sang Whi Lee & Donald J. Mullineaux, 2004. "Monitoring, Financial Distress, and the Structure of Commercial Lending Syndicates," Financial Management, Financial Management Association, vol. 33(3), Fall.
    23. Ivashina, Victoria, 2009. "Asymmetric information effects on loan spreads," Journal of Financial Economics, Elsevier, vol. 92(2), pages 300-319, May.
    24. Alberto Chong & Mark Gradstein & Cecilia Calderon, 2009. "Can foreign aid reduce income inequality and poverty?," Public Choice, Springer, vol. 140(1), pages 59-84, July.
    25. Heitor Almeida & Igor Cunha & Miguel A. Ferreira & Felipe Restrepo, 2017. "The Real Effects of Credit Ratings: The Sovereign Ceiling Channel," Journal of Finance, American Finance Association, vol. 72(1), pages 249-290, February.
    26. Ivashina, Victoria & Sun, Zheng, 2011. "Institutional stock trading on loan market information," Journal of Financial Economics, Elsevier, vol. 100(2), pages 284-303, May.
    27. Barro, Robert J. & Lee, Jong-Wha, 2005. "IMF programs: Who is chosen and what are the effects?," Journal of Monetary Economics, Elsevier, vol. 52(7), pages 1245-1269, October.
    28. Thomas Lambert, 2019. "Lobbying on Regulatory Enforcement Actions: Evidence from U.S. Commercial and Savings Banks," Management Science, INFORMS, vol. 67(6), pages 2545-2572, June.
    29. Dyck, Alexander & Lins, Karl V. & Roth, Lukas & Wagner, Hannes F., 2019. "Do institutional investors drive corporate social responsibility? International evidence," Journal of Financial Economics, Elsevier, vol. 131(3), pages 693-714.
    30. Emmanuelle Nys & Amine Tarazi & Irwan Trinugroho, 2013. "Political Connections, Bank Deposits, and Formal Deposit Insurance: Evidence from an Emerging Economy," Working Papers hal-00916513, HAL.
    31. Miller, Darius P. & Puthenpurackal, John J., 2002. "The Costs, Wealth Effects, and Determinants of International Capital Raising: Evidence from Public Yankee Bonds," Journal of Financial Intermediation, Elsevier, vol. 11(4), pages 455-485, October.
    32. Nishant Dass & Massimo Massa, 2011. "The Impact of a Strong Bank-Firm Relationship on the Borrowing Firm," The Review of Financial Studies, Society for Financial Studies, vol. 24(4), pages 1204-1260.
    33. Yaqi Shi & Michel Magnan & Jeong-Bon Kim, 2012. "Do countries matter for voluntary disclosure? Evidence from cross-listed firms in the US," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 43(2), pages 143-165, February.
    34. Jun Qian & Philip E. Strahan, 2007. "How Laws and Institutions Shape Financial Contracts: The Case of Bank Loans," Journal of Finance, American Finance Association, vol. 62(6), pages 2803-2834, December.
    35. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 31(3), pages 129-137.
    36. Rainer Haselmann & Katharina Pistor & Vikrant Vig, 2010. "How Law Affects Lending," The Review of Financial Studies, Society for Financial Studies, vol. 23(2), pages 549-580, February.
    37. Nys, Emmanuelle & Tarazi, Amine & Trinugroho, Irwan, 2015. "Political connections, bank deposits, and formal deposit insurance," Journal of Financial Stability, Elsevier, vol. 19(C), pages 83-104.
    38. Mariassunta Giannetti & Yishay Yafeh, 2012. "Do Cultural Differences Between Contracting Parties Matter? Evidence from Syndicated Bank Loans," Management Science, INFORMS, vol. 58(2), pages 365-383, February.
    39. Kee‐Hong Bae & Vidhan K. Goyal, 2009. "Creditor Rights, Enforcement, and Bank Loans," Journal of Finance, American Finance Association, vol. 64(2), pages 823-860, April.
    40. Giannetti, Mariassunta & Laeven, Luc, 2012. "The flight home effect: Evidence from the syndicated loan market during financial crises," Journal of Financial Economics, Elsevier, vol. 104(1), pages 23-43.
    41. Claessens, Stijn & Feijen, Erik & Laeven, Luc, 2008. "Political connections and preferential access to finance: The role of campaign contributions," Journal of Financial Economics, Elsevier, vol. 88(3), pages 554-580, June.
    42. Boehmer, Ekkehart & Megginson, William L, 1990. "Determinants of Secondary Market Prices for Developing Country Syndicated Loans," Journal of Finance, American Finance Association, vol. 45(5), pages 1517-1540, December.
    43. Shahrokh M Saudagaran, 1988. "An Empirical Study of Selected Factors Influencing the Decision to List on Foreign Stock Exchanges," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 19(1), pages 101-127, March.
    44. Max Bruche & Frederic Malherbe & Ralf R Meisenzahl, 0. "Pipeline Risk in Leveraged Loan Syndication," Review of Financial Studies, Society for Financial Studies, vol. 33(12), pages 5660-5705.
    45. Qi, Yaxuan & Roth, Lukas & Wald, John K., 2010. "Political rights and the cost of debt," Journal of Financial Economics, Elsevier, vol. 95(2), pages 202-226, February.
    46. Amir Sufi, 2007. "Information Asymmetry and Financing Arrangements: Evidence from Syndicated Loans," Journal of Finance, American Finance Association, vol. 62(2), pages 629-668, April.
    47. Lang, Mark & Smith Raedy, Jana & Wilson, Wendy, 2006. "Earnings management and cross listing: Are reconciled earnings comparable to US earnings?," Journal of Accounting and Economics, Elsevier, vol. 42(1-2), pages 255-283, October.
    48. Atif Mian & Amir Sufi & Francesco Trebbi, 2010. "The Political Economy of the US Mortgage Default Crisis," American Economic Review, American Economic Association, vol. 100(5), pages 1967-1998, December.
    49. Mark J. Garmaise & Gabriel Natividad, 2013. "Cheap Credit, Lending Operations, and International Politics: The Case of Global Microfinance," Journal of Finance, American Finance Association, vol. 68(4), pages 1551-1576, August.
    50. Sreedhar T. Bharath & Sandeep Dahiya & Anthony Saunders & Anand Srinivasan, 2009. "Lending Relationships and Loan Contract Terms," The Review of Financial Studies, Society for Financial Studies, vol. 24(4), pages 1141-1203.
    51. Carter, David B. & Stone, Randall W., 2015. "Democracy and Multilateralism: The Case of Vote Buying in the UN General Assembly," International Organization, Cambridge University Press, vol. 69(1), pages 1-33, January.
    52. Cai, Jian & Eidam, Frederik & Saunders, Anthony & Steffen, Sascha, 2018. "Syndication, interconnectedness, and systemic risk," Journal of Financial Stability, Elsevier, vol. 34(C), pages 105-120.
    53. João A C Santos & Andrew Winton, 2019. "Bank Capital, Borrower Power, and Loan Rates," The Review of Financial Studies, Society for Financial Studies, vol. 32(11), pages 4501-4541.
    54. Sanjeev Bhojraj & Partha Sengupta, 2003. "Effect of Corporate Governance on Bond Ratings and Yields: The Role of Institutional Investors and Outside Directors," The Journal of Business, University of Chicago Press, vol. 76(3), pages 455-476, July.
    55. Amy J Hillman & William P Wan, 2005. "The determinants of MNE subsidiaries' political strategies: evidence of institutional duality," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 36(3), pages 322-340, May.
    56. Darius P. Miller & Natalia Reisel, 2012. "Do Country-level Investor Protections Affect Security-level Contract Design? Evidence from Foreign Bond Covenants," The Review of Financial Studies, Society for Financial Studies, vol. 25(2), pages 408-438.
    57. Raymond Fisman, 2001. "Estimating the Value of Political Connections," American Economic Review, American Economic Association, vol. 91(4), pages 1095-1102, September.
    58. repec:zbw:bofrdp:2019_013 is not listed on IDEAS
    59. Ferri, Giovanni & Kalmi, Panu & Kerola, Eeva, 2014. "Does bank ownership affect lending behavior? Evidence from the Euro area," Journal of Banking & Finance, Elsevier, vol. 48(C), pages 194-209.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Hasan, Iftekhar & Politsidis, Panagiotis & Sharma, Zenu, 2020. "Bank lending during the COVID-19 pandemic," MPRA Paper 103565, University Library of Munich, Germany.
    2. Hasan, Iftekhar & Politsidis, Panagiotis N. & Sharma, Zenu, 2021. "Global syndicated lending during the COVID-19 pandemic," Journal of Banking & Finance, Elsevier, vol. 133(C).
    3. Ambrocio, Gene & Gu, Xian & Hasan, Iftekhar, 2022. "Political ties and raising capital in global markets: Evidence from Yankee bonds," Journal of Corporate Finance, Elsevier, vol. 74(C).
    4. Delis, Manthos D. & Kim, Suk-Joong & Politsidis, Panagiotis N. & Wu, Eliza, 2021. "Regulators vs. markets: Are lending terms influenced by different perceptions of bank risk?," Journal of Banking & Finance, Elsevier, vol. 122(C).
    5. Hasan, Iftekhar & Kim, Suk-Joong & Politsidis, Panagiotis & Wu, Eliza, 2020. "Syndicated bank lending and rating downgrades: Do sovereign ceiling policies really matter?," MPRA Paper 102941, University Library of Munich, Germany.
    6. Ambrocio, Gene & Hasan, Iftekhar, 2021. "Quid pro quo? Political ties and sovereign borrowing," Journal of International Economics, Elsevier, vol. 133(C).
    7. Hasan, Iftekhar & Kim, Suk-Joong & Politsidis, Panagiotis N. & Wu, Eliza, 2021. "Loan syndication under Basel II: How do firm credit ratings affect the cost of credit?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 72(C).
    8. Ambrocio, Gene & Hasan, Iftekhar, 2019. "Friends for the benefits: The effects of political ties on sovereign borrowing conditions," Research Discussion Papers 13/2019, Bank of Finland.
    9. repec:zbw:bofrdp:2019_013 is not listed on IDEAS
    10. Ambrocio, Gene & Hasan, Iftekhar, 2019. "Friends for the benefits: The effects of political ties on sovereign borrowing conditions," Bank of Finland Research Discussion Papers 13/2019, Bank of Finland.
    11. Delis, Manthos & Kim, Suk-Joong & Politsidis, Panagiotis & Wu, Eliza, 2020. "Regulators vs. markets: Do differences in their bank risk perceptions affect lending terms?," MPRA Paper 98548, University Library of Munich, Germany.
    12. Delis, Manthos D. & Politsidis, Panagiotis N. & Sarno, Lucio, 2022. "The cost of foreign-currency lending," Journal of Banking & Finance, Elsevier, vol. 136(C).
    13. Yin-Siang Huang & Iftekhar Hasan & Ying-Chen Huang & Chih-Yung Lin, 2021. "Political Uncertainty and Bank Loan Contracts: Does Government Quality Matter?," Journal of Financial Services Research, Springer;Western Finance Association, vol. 60(2), pages 157-185, December.
    14. Gong, Di & Xu, Jiajun & Yan, Jianye, 2023. "National development banks and loan contract terms: Evidence from syndicated loans," Journal of International Money and Finance, Elsevier, vol. 130(C).
    15. Delis, Manthos & Politsidis, Panagiotis & Sarno, Lucio, 2018. "Foreign currency lending," MPRA Paper 88197, University Library of Munich, Germany.
    16. Jackowicz, Krzysztof & Kozłowski, Łukasz & Podgórski, Błażej & Winkler-Drews, Tadeusz, 2020. "Do political connections shield from negative shocks? Evidence from rating changes in advanced emerging economies," Journal of Financial Stability, Elsevier, vol. 51(C).
    17. Ambrocio, Gene & Hasan, Iftekhar & Li, Xiang, 2023. "Global political ties and the global financial cycle," IWH Discussion Papers 23/2023, Halle Institute for Economic Research (IWH).
    18. Delis, Manthos D. & Iosifidi, Maria & Mylonidis, Nikolaos, 2021. "Industry heterogeneity in the risk-taking channel," Economic Modelling, Elsevier, vol. 104(C).
    19. Dorobantu, Sinziana & Müllner, Jakob, 2019. "Debt-side governance and the geography of project finance syndicates," Journal of Corporate Finance, Elsevier, vol. 57(C), pages 161-179.
    20. Mohammed Saharti & Sajid M. Chaudhry & Nisar Ahmad & Syed Mujahid Hussain, 2024. "Syndicated loans: mapping the trends, sources and intellectual evolution," Review of Quantitative Finance and Accounting, Springer, vol. 62(4), pages 1569-1592, May.
    21. Gang Wang & Yi Shen, 2023. "Did quantitative easing reduce the borrowing costs of firms? The risk‐taking channel," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(1), pages 507-536, March.

    More about this item

    Keywords

    Global syndicated loans; Political ties; Loan pricing;
    All these keywords.

    JEL classification:

    • F50 - International Economics - - International Relations, National Security, and International Political Economy - - - General
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:103608. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.