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Regulation and information costs of sovereign distress: Evidence from corporate lending markets

Author

Listed:
  • Hasan, Iftekhar
  • Kim, Suk-Joong
  • Politsidis, Panagiotis N.
  • Wu, Eliza

Abstract

We examine the effect of sovereign credit impairments on the pricing of syndicated loans following rating downgrades in the borrowing firms' countries of domicile. We find that the sovereign ceiling policies used by credit rating agencies create a disproportionately adverse impact on the bounded firms' borrowing costs relative to other domestic firms following their sovereign's rating downgrade. Rating-based regulatory frictions partially explain our results. On the supply-side, loans carry a higher spread when granted from low-capital banks, non-bank lenders, and banks with high market power. We further document an operating demand-side channel, contingent on borrowers' size, financial constraints, and global diversification. Our results can be attributed to the relative bargaining power between lenders and borrowers: relationship borrowers and non-bank dependent borrowers with alternative financing sources are much less affected.

Suggested Citation

  • Hasan, Iftekhar & Kim, Suk-Joong & Politsidis, Panagiotis N. & Wu, Eliza, 2023. "Regulation and information costs of sovereign distress: Evidence from corporate lending markets," Journal of Corporate Finance, Elsevier, vol. 82(C).
    • Handle: RePEc:eee:corfin:v:82:y:2023:i:c:s0929119923001177
    DOI: 10.1016/j.jcorpfin.2023.102468
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    References listed on IDEAS

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    1. Joan Farre-Mensa & Alexander Ljungqvist, 2016. "Do Measures of Financial Constraints Measure Financial Constraints?," The Review of Financial Studies, Society for Financial Studies, vol. 29(2), pages 271-308.
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    More about this item

    Keywords

    Credit ratings; Sovereign ceiling; Syndicated loan pricing; Rating-based regulation; Firm credit constraints; Bank dependency; Bargaining power;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • 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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